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Mergers and acquisition activity in 2019 has hit several lows, however, mega-deals remain high


  • What drove the decline in global M&A activity in YTD 2019?
  • Why did some dealmakers make big bets in a slow economic environment this year?

 

After an aggressive performance in 2018, the global merger and acquisition (M&A) activity had been docile in 2019 from the start of year itself. In the first 9 months of 2019, there have been 25,754 number of deals worth $3.05 trillion – a decline of 5.6% from $3.23 trillion worth of deals in the same period last year, with Q3 2019 largely causing this drop.

During Q1 2019, the global M&A market recorded 7,470 deals worth $1.01 trillion (10% decline from Q1 2018). In this period, APAC witnessed M&A deals worth $179.5 billion – lowest since 2017. Within Asia, China saw a sharp dip in its M&A transactions, declining by 34.8% from $119.4 billion in Q1 2018 to $77.8 billion in Q1 2019. EMEA also witnessed subdued activity from the beginning of the quarter, however, ended the quarter with a mega-deal (deals worth more than $10 billion) - Saudi Aramco’s acquisition of 70% stake in SABIC for $69.1 billion. This single mega deal contributed 26% to the total deal value of $261.4 billion via 2,329 deals in the region. On the contrary, North America, began the quarter with a mega-deal itself, where Bristol-Myers Squibb Co. announced the acquisition of Celgene Corp for $96.8billion.

The overall decline in M&A activity continued in Q2 2019 as well, which saw ~7% decline in deal value from $1.24 billion (Q2 2018) to $1.15 billion (Q2 2019). However, the quarter can be characterized as the one flooded with mega-deals worth $878.9 billion via 28 deals, reflecting an increase of 26.7% in H1 2018 ($693.8 billion from 27 deals). This was primarily prompted by consistently low interest rates and easy availability of financing together with slow organic growth. The global editorial analytics director, Beranger Guille of Mergermarket stated in a recently published report, “The dynamics suggest dealmakers are looking for fewer, larger deals. Whether they are motivated by the desire to get more growth, or a way to secure future survival, deals are getting larger”. Hence, although, acquirers seem low on confidence in the overall global economic environment, however, those getting their hands dirty are targeting big even in this environment as they see this as an opportunity to grow inorganically.

Nonetheless, the overall decline in M&A transactions magnified to 15% in Q3 2019 with deals worth $729 billion vs $855 billion in Q3 2018. This quarter witnessed lowest quarterly volume since 2016 primarily because of intensifying concerns over the US-China trade war. The United States of America saw deals worth $246 billion reflecting 40% decline from the same period last year - lowest quarterly volume since 2014. This was mainly driven by weakening investment sentiment amidst low consumer spending and subdued business spending weighed by the trade tensions. Asia also saw 20% decline with deals valuing $160 billion, again lowest since 2017, driven by cloudy economic outlook due to trade war as well by uncertainty over the future of Hong Kong as a financial hub. Europe saw a whopping 45% dip in M&A transactions – total deals valuing $249 billion.

A significant slowdown witnessed in Q3 is a reflection of companies losing confidence as they seem to be assessing the economic backdrop due to the escalating US-China trade war amongst other headwinds. Experts also echo this. “Companies looking at deals have become more risk-averse and this is likely to bring M&A volumes down for the year. But we expect M&A activity to be strong going into next year,” stated Robin Rankin, global co-head of mergers and acquisitions at Credit Suisse Group.

Hence, the F9M 2019 saw significant decline in M&A activity mainly contributed by Q3 and driven by uncertain economic conditions stemming from the US-China trade war, which has ultimately overshadowed low cost of debt financing for acquisitions.

For the rest of the 2019, some experts do foresee healthy M&A pipeline, which perhaps could match last year’s annual value of $3.91 trillion in announced transactions as the year has already hit some records in terms of mega-deals. For example - Michael Carr, global co-head of M&A at Goldman Sachs Group Inc., recently stated- “Management teams are watching very closely because shareholders expect companies to take advantage of these conditions to grow their business,”. On the other hand, all international economic organizations are signalling a slowdown in the global economy, which is expected to further demotivate acquirers from making any big investment. Hence, driven by the combination of slow economic outlook and management teams/acquirers quest to pursue inorganic growth, the M&A activity might stabilize in Q4 compared to substantial drop in Q3, however, on annual basis it is expected to remain low in 2019 compared to last 3 years (2016-2018).

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