M&A ROAD MAP
BREAKING THE ‘CURSE OF SEVEN’
Tharindra Gooneratne charts the likely trajectory of global M&A activity in 2017
‘The curse of seven’ dictates that 2017 is poised to be a year of calamity – 1987 is remembered for Black Monday when the Dow Jones shed over 22 percent in a single day while 1997 marked the beginning of the Asian financial crisis. The events of 2007 are also fresh in everyone’s minds.
But there’s no reason to panic just yet.
The International Monetary Fund (IMF) expects global economic growth to accelerate to 3.4 percent this year from 3.1 percent in 2016. China, Nigeria and the US have seen their growth forecasts revised upwards, signalling optimism at least on the part of the IMF.
Will the ‘curse of seven’ finally be broken?
How companies decide to answer this question will largely determine the outlook for mergers and acquisitions (M&A) this year.
Last year witnessed a year-on-year (y-o-y) decline in M&A activity with transactions worth US$ 3.6 trillion announced globally. This represented a 17 percent drop from the record 4.4 trillion dollars’ worth of transactions that were announced in 2015.
A number of factors affected this decline. The most significant of these was an increase in political and economic uncertainty, driven by the US presidential election and Brexit. A wave of populism spread across the world and higher macroeconomic risks undermined the attractiveness of many potential acquisition targets. So a number of entities adopted a ‘wait and see’ approach to M&As.
Secondly, regulators doubled down on efforts to investigate and subsequently block mega transactions, leading to numerous failed deals mainly due to anti-trust concerns. According to The New York Times, over 1,000 deals worth almost 800 billion dollars were abandoned last year – a record in the post-recession period.
Thirdly, rock-bottom funding rates that have been a boon for acquirers in the past began climbing upwards, fuelled by the policy tightening of the US Federal Reserve, a change in risk-return dynamics in the wake of Brexit and expectations of an uptick in inflation. Despite the y-o-y decline fuelled by these factors, 2016 was the second-best year for M&A in the post-financial crisis era. So while these factors played a role in the y-o-y decline in volume, they did not represent a noose around the neck of the M&A market.
This brings us to the four-trillion-dollar question: what about this year?
An initial glance offers cause for optimism.
Global M&A in 2016 was significantly rear-loaded with a third of annual deal volume being announced in the final quarter – four of the five largest deals for the year were announced in this period.
The election of President Donald Trump, along with Republican control of the legislature, is believed to have increased confidence in the US economy while creating an expectation of lighter regulation. The expectations are that this late surge in optimism will spill over, providing momentum at least in the first quarter of 2017.
A second factor that is expected to drive M&A is the large corporate cash pile that’s been growing at a steady pace since 2007. In 2015, US companies in the non-financial sector reported a total cash pile of 1.7 trillion dollars of which US$ 1.2 trillion is estimated to have been parked overseas.
Improved global growth prospects combined with potential tax reform in the United States are expected to encourage entities to invest cash in M&A.
Private equity funds too are sitting on all-time-high dry powder (funds raised but not yet invested) of over 1.4 trillion dollars and can be expected to utilise at least a portion of these funds this year.
Another positive for M&A in 2017 is the rise of activist shareholders who have managed to obtain stakes and subsequently influence strategy in companies like Apple, Kraft Foods, DuPont and Mondelēz in the recent past. A key area of focus for activists has been divestitures of non-core subsidiaries, which benefits the M&A space.
Within the M&A space, sectors such as consumer and retail are expected to benefit from potential mega deals this year, driven by companies like 3G Capital (a Brazilian investment firm that recently made a friendly offer of US$ 143 billion for Unilever).
M&A activity in the financial institutions space may pick up especially in the US as a result of the potential rollback of stringent Dodd-Frank reguxlations implemented in the post-crisis period.
If low energy prices continue throughout 2017, they may prompt consolidation among companies in this space – mainly in terms of vertical integration between refiners, and oil and gas exploratory entities.
Finally, tech firms may decide to utilise their large cash balances on acquisition sprees especially in the wake of potential tax reform.
By no means will the M&A journey be smooth this year. Political uncertainty remains high with elections in France and Germany where far-right parties have gained traction among voters. And politicians across the globe continue to fuel ‘anti-trade’ and ‘anti-big business’ sentiments among the populace.
Funding rates have continued their upward trajectory especially in the immediate aftermath of Trump’s victory. But expectations of a rejuvenated global economy, potential tax reform leading to increased utilisation of overseas cash balances and a strong appetite among companies for M&A are expected to trump these negatives.
This scenario will enable M&A in 2017 to be at least on a par with 2016 in terms of deal flows.
It seems that the ‘curse of seven’ will be broken, after all.