Our 2019 M&A outlook
We expect robust M&A activity to continue in 2019, even in the face of geopolitical and regulatory headwinds. Traditional strategic and private equity investors, together with sovereign wealth funds and family offices, have available capital and strong balance sheets ready to deploy. Converging technology, focus on core business lines, and opportunities to consolidate or spread risk all provide strong incentives for market participants to find solutions and to pursue growth through M&A transactions.
Private equity firms are well-positioned for dealmaking with a record US$1.2tn of deployable capital in combination with readily available debt financing. In addition, alternative sources of capital such as large pension funds and sovereign wealth funds are expected to be increasingly active through direct investing. Family offices also are a growing alternative source of capital with more than 5,300 family offices holding over US$4tn of assets globally. By taking a longer-term view, large family offices can challenge private equity firms as the investors preferred by target company management.
Manufacturers facing uncertainty over trade tariffs and protectionist measures could take advantage of increasing automation and shift resources toward manufacturing facilities that are geographically closer to customers, even where labor costs are higher. By acquiring and developing manufacturing facilities in customers’ backyards, companies can reach those markets locally rather than through the customs house and bring job creation, investment and domestic production favored by local governments.
Divesting and consolidating to grow
As companies and private equity firms refocus strategy and pursue new technologies, divestitures and spin-offs of noncore business units and portfolio companies will provide opportunities to unlock value by prioritizing core businesses. Consolidation of industry players is anticipated to continue, particularly in Europe, where consolidation opportunities in sectors such as utilities, financial institutions, pharmaceuticals, and chemicals have not yet taken off in large measure. Returns could be rewarding, in a market that continues to build on 2018 trends, including activist pressure on strategic acquirers to expand.
Spreading the risk
Companies are looking beyond the borders of their traditional markets. Investments and projects outside a company’s geographic comfort zone are being motivated less by potentially higher yields in higher-risk geographies, and more by a desire to balance the risk profile of growing international business. In this spirit, construction firms and industrial players from Europe are expected to be increasingly active in Africa, Middle East, and Asia instead of in more mature markets.
Healthy balance sheets
Strategic acquirers continue to benefit from healthy balance sheets with an abundance of cash available for M&A. The rewards of U.S tax reforms that took effect in 2018 will continue to position U.S. multinationals to apply cash previously held off-shore toward increased M&A by U.S. parties. Given the strong cash position on many balance sheets, companies will continue to face activist pressures to utilize available cash for deals or share repurchases.
Navigating geopolitical events
While protectionism, Brexit, and ongoing U.S.-China trade disputes dominate headlines, dealmaking should continue at a strong pace in 2019 as sophisticated acquirers become more comfortable with perceived geopolitical and regulatory risks. In spite of Brexit woes, UK targets remain attractive to buyers, with non-UK buyers seeing the weak sterling as an opportunity to acquire UK corporates with significant global international operations.
Competition to develop new technology will continue to drive M&A volume and valuations. As industrial businesses converge with technology, strategic acquirers not historically viewed as technology firms are expected to continue to seek opportunities to supplement existing research and development capabilities.
Corporates will look to pursue acquisitions of technology companies as well as venture capital-styled minority investments sometimes merely to get a foot in the door to promising companies and technologies. Strategic alliances and joint ventures — even with traditional competitors — will play an important role as firms seek to share the costs and risks of building leading edge technologies, while a wave of technology IPOs also could bolster M&A in the technology sector.
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