In spite of a general environment of political and economic uncertainty and a daily sprinkling of stock market volatility, trade wars, sanctions, the U.S. government shutdown disrupting the market for IPOs, Brexit uncertainty, natural disasters and various other crises, cross-border M&A activity momentum continues. New records were attained in the past twelve months, eclipsing the previous highs set pre-2008 financial crash. The following 10 key trends are underpinning hyperactivity in global M&A markets and are set to continue to shape deals well into 2019.
1. National security – politics, protectionism and intervention
Foreign investment being viewed as a risk to national security is at the forefront of regulatory agendas globally.
- There is an increasing range of industries and businesses with national security touch points that historically would not have raised any eyebrows, including in semiconductors, AI, virtual reality technology, robotics and large-scale data storage. Technological superiority is now commonly equated with national security.
- In October 2018, CFIUS (the Committee on Foreign Investment in the United States) launched a pilot program to require mandatory notification of certain non-controlling investments by foreign persons in U.S. businesses touching “critical technologies.” The pilot program is a material move away from what used to be a principally voluntary regime and is sure to have an impact on the number of CFIUS filings.
- In July 2018, the U.K. government published a white paper on its proposal to allow the scrutiny of foreign investments in any sector of the economy upon a “reasonable suspicion” of a national security threat. Examples include review of investments that may potentially lower R&D or that involve access to personal records. The U.K. government estimates that if this proposal, which looks very similar to the CFIUS construct, is adopted, it will lead to a material increase in notifiable transactions. Feedback from the consultation, which closed in October, has yet to be published.
2. Politicization of antitrust and merger review largely in check
While the political climate has led to a tightening of controls on foreign ownership on both sides of the Atlantic, there are few signs that populism is spilling over into merger control review or wider antitrust enforcement. In the U.S., the number of “second requests” issued to scrutinize transactions closely and the number of challenges in the past 12 months were in fact down modestly over the previous year, rather than up. There is no indication that U.S. antitrust reviews are being used to target foreign investment – in contrast to the CFIUS process that is unquestionably raising hurdles to foreign acquisitions. As we saw with the AT&T/Time Warner case, any merger challenge by the U.S. agencies needs to survive judicial scrutiny, based on the application of antitrust principles. In the EU, political concerns about the market power of (generally American) technology companies appear to have contributed to heightened scrutiny of some transactions, without changing their ultimate outcome. Overall, intervention rates in EU merger reviews are running at levels that are broadly consistent with the last decade.
3. Trade relations take center stage
Closely linked to national security deal scrutiny, the quick moving sways in the political climate, changing trade dynamics and public opinion are impacting individual transactions. The current U.S./China trade relationship has shifted Chinese investment focus to acquisitions in Europe, Africa and Central and Southeast Asia.
4. Rise in failed deals
The growing politicization of the M&A environment also led to a rise in failed deals in the past 12 months. Increasing protectionism and political intervention has had a negative impact on high-profile cross-border deals. More than ever the success of a transaction requires careful advance preparation, well thought out strategies and good timing, not all of which is within the control of deal makers.
5. Mega-deals rule
The value paid for desirable targets has generally been creeping upwards. It remains a seller’s market, and corporate giants are reaching for M&A to head off competitive threats and expand their businesses. Certain sectors, in particular energy, healthcare and technology, have seen growing consolidation. Financial sponsors are helping to drive the mega-deals trend by vying with strategic acquirers for the most attractive assets, driving multiples and higher prices.
6. Money is no object, but good deals are increasingly hard to come by
In what remains largely a low organic growth environment, deals were being funded by the record levels of dry powder held by private equity and cash piles repatriated by U.S. corporations following the U.S. tax reforms adopted at the end of 2017. Sponsors are adapting strategies to find returns and compete with corporate purchasers for quality assets, including forming consortiums to pool capital and acquiring large, public companies as the competition for privately held assets intensifies.
7. Data tech is king
Data M&A continues to fuel deals in both typical tech and non-tech transactions. Data is now firmly established as one of the biggest assets of a company, often valued at a premium, and vital for a business to stay relevant in the current market. As data regulations are becoming increasingly complex and cybersecurity remains paramount, companies need to be able to understand, extract and use data. Buyers want to capitalize on data-tech clients to bolster their digital strategy and realize value. No industry is immune to tech’s encroachment. Without question, almost all companies need to be technology and data driven in the future.
8. “Acqui-hires” – when talent matters more than assets
Buyers continue to recognize the importance of acquiring the talent within the business, rather than the business or assets themselves – otherwise known as an acqui-hire. A popular strategy with technology companies, acqui-hiring secures and retains the knowledge and experience of the individuals who created and understand the data set and technology systems. At least for the initial period post-acquisition, the role of the key founding managers and employees is being more highly valued than ever before.
Buyers also continued to focus on retaining highly knowledgeable and talented management teams by negotiating business objective based earn-out provisions, increasing re-vesting restrictions and complex bonus structures to ensure successful management teams remain on board with the new business owner.
9. Shareholder activism is here to stay
Shareholder activism continues to proliferate. Activism has grown not just in the U.S. but also in European and Asian markets, with investors demanding higher offers and divestment of subsidiaries, while putting increased pressure on companies to revise existing strategic business plans. With Elliott Management seeking to shake-up Pernod Ricard in December 2018 and break-up eBay in January 2019, it and other activist shareholders are demanding radical action which, as well as keeping many boards awake at night, is increasingly welcomed by other investors. Once viewed as nothing but bullish strategy and negative aggression, some of the newer “activism” models provide a platform for companies to access valuable sources of information, analysis and strategy building, along with productive dialogue among principals.
10. The U.K.’s future relationship with the EU becomes increasingly uncertain
Finally, with the U.K. due to leave the EU on March 29, 2019, the failure so far to secure backing for the government’s Brexit plan has left the door open to an even wider range of possible outcomes than many had entertained in 2018. Possible scenarios include a “no-deal” Brexit, postponement of the leave deadline, a second referendum or even a general election. The growing uncertainty has pushed Brexit further up the political agenda in the U.S. as lawmakers recognize the need to consider and plan for its potential impact on the U.S. economy and the international financial system. The specter of Brexit and related volatility in the pound will undoubtedly impact European M&A activity in 2019 – but in the midst of chaos, there is also opportunity!