M&A in 2018: What will characterise next year's transactions?

06. December 2017 | Drooms Global

M&A activity has been on an upward trajectory in the past few years. In 2015, such activity reached a record-breaking US$4.3 trillion worldwide. Although this activity has since slowed slightly, deal sizes are hanging on – it’s been a seller’s market. So, what are the predictions for 2018?

The M&A climate in 2017 has witnessed challenges in capital deployment. While the availability of capital is at record-breaking levels, the industry is stifled with heightened valuations and competition. Deal flow has been constrained and has led to a limited number of deals with impressive deal valuations.

Baker & McKenzie’s report from 2018 predicted the global M&A to peak this year in developed markets, with emerging markets to follow suit in 2018. The anticipation is for interest rates to start climbing and the equity markets to begin dwindling – this would lead to a slowing down of global activity. The signs of this are already happening – the Bank of England announced at the start of November that it would be increasing interest rates for the first time in a decade.

Uncertainty to drive the first half of 2018

The repercussions of the UK’s decision to leave the European Union and the results of the U.S. presidential election are still being felt throughout the market. The decisions have played a role in creating an environment of uncertainty, which has also been influenced by China’s economic slowdown and decreasing oil and commodity prices. These conditions are not expected to go away, at least until the latter parts of 2018.

Deal activity to bounce back in the latter half of 2018

Research by Baker & McKenzie and Oxford Economics predicts that deal activity will pick up as greater clarity emerges in 2018. According to their predictions, global M&A activity could peak at US$3 trillion in 2018 before slowing again in 2019 and 2020. Furthermore, law firm Dykema’s latest survey shows that respondents view the future positively, with 39% of respondents stating that the M&A market will strengthen in the next 12 months.

Fintech to drive deal numbers

What about the industries that will continue to see M&A deals? The Baker & McKenzie report predicts that the technology sector will drive M&A deals. According to their data, the sector’s deals could reach US$415 billion by next year, which would be the highest level since 2000. Michael J. Grossman from RSM US LLP has also pointed out the strength in the technology sector’s growth – especially in terms of cross-sector deals. Fintech and technology in the automotive sector have had a strong year in terms of M&A. Fintech solutions targeting the M&A profession are increasingly developing as well, as we see with Drooms DEALFLOW.

The Baker & McKenzie report also predicts healthcare to continue to attract mergers and acquisition. However, this could change depending on what happens in the U.S. healthcare market regarding the continuous effort to repeal and replace the Affordable Care Act.

North America to maintain its top spot

In terms of regional trends, North America’s control over M&A deals seems to continue into 2018. This expectation is largely based on speculation that the new administration will adopt a pro-business policy agenda and there are hopes that the tax reforms might incentivise dealmaking in the U.S. However, the situation is still unclear and the resulting approaches could mean a different outlook for M&A. Thomas Vaughn, co-leader of Dykema’s M&A practice said, ‘We are still hearing that uncertainty around the Trump administration’s priorities and regulations will have the greatest impact on M&A from a global perspective’.

In terms of Europe, much depends on the Brexit negotiations. According to Baker & McKenzie, an amicable separation would only have a minor impact on a forecast of US$613 billion worth of deals in the region, excluding the UK. In the UK, the expectation is for the deal value to slightly drop.

Deal appetite in the rest of the world is likely to slow down – in Asia-Pacific, China’s economic growth is causing deal numbers to drop while Africa and the Middle East will need to deal with persistent security uncertainties and falling oil prices.

A rebound in activity

Overall, the M&A sector will continue to face upheaval and uncertainty in 2018. However, in terms of transactions, deal numbers might pick up as interest rates begin to rise, and the market should begin to witness more clarity over the direction of the Trump Administration and Brexit. Large deals are still likely to control the headlines and the story of M&A might look similar to this year.