Despite uncertainty, M&A remains high on the agenda

22 November 2019 Consultancy.eu

Despite geopolitical unrest and economic uncertainties, M&A advisors globally remain positive about the outlook of the merger & acquisitions market, finds a new study by Baker Tilly and Mergermarket.

According to the study, the outlook for the M&A market is rosy. 61% of the respondents said that they believe that deal value in the domestic market will rise in the coming period, while even 71% said that they foresee a ramp up of cross-border M&A deal value. Those eyeing cross-border deals regard Southeast Asia (42%) and North America (40%) as the top two favoured M&A regions.

The positive outlook comes on the back of an already booming period for dealmakers worldwide. In the first half of this year, the researchers uncovered that global M&A value reached $1.86 trillion, increasing 21% over the second half of 2018 ($1.5 trillion). Although this was 8% less than the first half of 2018 (when $2 trillion in deals were announced), it was the second-highest half year on record.

Global M&A (Domestic and cross-border dealmaking)

These sentiments are according to Michael Sonego, Baker Tilly’s Global Corporate Finance Lead, remarkable for a number of reasons. “Heightened geopolitical risks and rising protectionism mean M&A, particularly for buyers venturing beyond their home borders, has never been more challenging. Add to that shaky economics in key markets and whispers of a recession and it would seem the risks outweigh the rewards of these corporate endeavours.”

But, companies seem to be taking a conscious risk on the premise that it would be too defensive to abandon dealmaking altogether, and instead opt for a more offensive approach to cater the disruption sweeping through markets. “Respondents say the need of reaching new customers, acquiring new technology and accessing various market opportunities cannot simply be stopped given complexities in the current market – rather, they must adapt and prepare for these challenges today. In other words, action now better prepares them for tomorrow’s challenges,” said Sonego.

He added: “Uncertainties are becoming a motor for M&A activity. Awareness is growing that disruption in global markets is becoming the new normal.”

Noteworthy is that the high level of deal values in the first half of 2019 has been realised with lower volumes, implying that on average, transactions are becoming larger in size. This is in part due to consolidation seen in mature markets, as well as heightened scrutiny from investors, in particular financial sponsors, on their targets.

Europe's woes

From a regional perspective, Southeast Asia is seen as the most promising region due to the exciting potential unfolding in the region, with an expanding middle-class population and rapid rates of growth. Meanwhile, North America – notably the biggest economy in the world – has posted strong growth over the past two years and is stable and familiar.

What do you think will happen to the level of M&A activity in the following markets in the next 12 months?

However, in Europe, the situation is very different. Far fewer respondents (just 24%) believe M&A activity is set to increase over the next year, reflecting conditions on the ground. During the first six months of 2019, Europe accounted for only 22% of global deal values and 40% of deal volumes, lower than its average over the past years. Not surprisingly, Brexit is a key factor, pulling down the number of UK and cross-border UK deals closed.

Olivier Willems, EMEA Corporate Finance Lead at Baker Tilly said: “Increasing uncertainty concerning Brexit, Italy’s worsening financial state, a decrease of the GDP growth in the European region and other recent events, have started casting a shadow over European inbound M&A activity.”

Growing competition

Respondents were also asked to assess the competitive landscape. Nearly half of the respondents (49%) expect that competition for M&A will intensify in the coming twelve months. Private equity groups are seen as the largest instigator, for a number of reasons, including access to funds (private equity is sitting on record levels of dry powder) and a quicker decision-making process compared to other buyers.

Also the competition from corporates seeking to buy counterparts within their own industry is forecast to rise. “The need for transformational acquisitions to improve customer satisfaction and scale makes corporate buyers a major part of the competition,” said Sonego. Meanwhile, corporate buyers are also ramping up their corporate venturing – investments in innovative start-ups.