Region: North America
While I believe I’m not unique in doing an end of year review, I must admit that 2017 was interesting to say the least. So much so, that I wanted to share some of my observations. Regardless of whether you were on the buy or sell side, a Private Equity (PE) or Corporate/Strategic participant, there were several global and domestic critical factors that created a very unique environment for M&A activity. Here are some of my thoughts below:
The global economy is experiencing a period of synchronous growth along with record fundraising and capital overhang in private equity and alternative investments that has driven asset valuations to record levels, thus negatively impacting both the total global value and volume of M&A activity.
Despite a slowdown in the outflow of capital from China for foreign investments due to capital controls put in place by the Chinese government, as well as, nationalistic policies established in such places as the US and Europe to limit foreign investment, asset valuations still remain high.
Uncertainty around Brexit has not significantly impacted European M&A activity and in fact M&A activity in Europe appears poised for a robust 2018 given greater market uncertainty in other geographies.
Expected 2018 GDP growth and currency movements are driving cross-border deal activity into emerging markets.
To date, global markets have significantly overlooked negative geo-political events (e.g. – North Korea) but major risks still exist that could impact global M&A activity.
The passing of the Tax Reform and Jobs Creation Act will spur significant domestic M&A activity as corporates will spend excess cash in 2018 to buy growth.
The risk exists that this additional stimulus, on top of an already heated U.S. economy with record high public equity markets, will spur inflation, thus forcing the Fed to raise interest rates too quickly above previously issued guidance and “shocking the system” – resulting in a potential boom-bust cycle. Accordingly, buyers at what may potentially be the top of the cycle need to implement strategies to mitigate this risk.
Ultimately increasing interest rates and limited interest expense deductibility will put downward pressure on leveraged buyout returns thus curtailing larger value deal activity – future deal activity will be more focused on middle market transactions requiring less leverage.
Technology will continue to upend traditional business models thus creating both divestitures and M&A activity in many sectors in order to compete in this new economy. Traditional business models will be forced to adapt to the new normal.
Corporates repatriating cash to the US along with a reduction in the corporate tax rate will also spur M&A activity – combined with a record level of capital overhang from private equity, family office and sovereign wealth fund investors – will continue to keep asset valuations at or near record levels in 2018.
In close, as we look ahead into 2018, the only thing certain is change. Clearly, the economy has been on a long growth trend. It is still robust and seems resilient despite many factors impacting it on all sides. However, I’d caution that we still need to be prepared for just about anything to change the M&A environment. I believe the right approach & outlook for M&A in 2018 will be:
1. Be strategic in deal selection.
2. Ensure that you can create value in any deal.
3. Mitigate risk at every stage of the deal.
The players who can do these three things and do them well, will fair the best in the event of potential stormy weather. Further, they will capitalize the most on sunny days ahead.
For more about our Alvarez & Marsal Global Transaction Advisory Group: https://www.alvarezandmarsal.com/expertise/global-transaction-advisory