Global M&A value hits new heights in 2018 despite Q4 headwinds

Deal value in 2018 was well above 2017 levels but growing political and economic instability led to a tail-off in the second half of the year

Given the backdrop of growing political tensions—including rising protectionism around the world, a potential trade war between the world’s two largest economies, and continued uncertainty surrounding Brexit—dealmaking might have been expected to fall this year.

However, global deal value in 2018 was one of the highest on record, with a total US$3.52 trillion, an 11.4% rise on 2017. Volume also nearly set a new record, with 19,105 deals recorded in the year.

This despite a fourth quarter that saw a decrease in terms of both value and volume compared to the same period a year earlier. Global deal value in Q4 totaled US$697.2 billion, a 26% drop from the same period in 2017. Q4 deal volume fell by 23%, to 4,055 deals.

Only two of the top 20 deals of the year—IBM’s US$32.5 billion acquisition of Red Hat and Harris Corp.’s US$18 billion acquisition of L3 Technologies—were announced in Q4. By comparison, five of the top 20 deals in 2017, including the year’s two largest deals, were announced in Q4.

Defense boosts final quarter

On a brighter note, defense sector M&A had its highest quarter since 2013, with total deal value of US$23.7 billon, thanks in large part to one megadeal, Harris Corp.’s acquisition of L3 Technologies for US$18 billion. The quarter also saw the announcement of TransDigm’s acquisition of Esterline for US$4 billion. With rising government spending on defense, the industry could see further M&A activity going forward.

Looking at the year overall, Technology, Media and Telecommunications (TMT) was the strongest sector with US$698 billion in deal value. This figure was down to a number of well-publicized megadeals and a continuation of the cross-sector convergence trend. The Energy, Mining and Utilities (EMU) was the second place sector, with deals totaling US$672.6 billion in deal value, thanks to the stabilization of oil prices (for the majority of the year) and the continued development of the renewable energy industry. Significant deals included Energy Transfer Equity’s US$59.6 billion acquisition of its affiliate Energy Transfer Partner and the US$46.6 billion tie-up between German renewable energy firms E.ON and Innogy.

Politics hits M&A

Despite robust topline figures, political tensions have evidently started to take a toll on dealmaking activity. Increased scrutiny from US authorities have pushed Chinese bidders to look elsewhere, leading to a massive drop in Chinese buys of US-based companies. China to US inbound deal value fell to just under US$3 billion in 2018, the lowest level since 2011 and far below the record high of US$56.7 billion in 2016. In contrast, Western Europe saw a 78% increase in inbound M&A value from China-based bidders, to US$58.8 billion from US$33 billion in 2017.

After a decade of exceptionally good financing conditions due to unprecedentedly low interest rates, the coming year could signal the start of a return to lower levels of dealmaking. Rising interest rates, a potential economic slowdown, growing protectionism in markets around the world, and the looming threat of a trade war between China and the US, could all contribute to lower M&A activity.

Brexit and high tech hopes

However, there are several factors that should give hope to dealmakers for 2019. A resolution to the uncertainty around Brexit could see deals back on the table—particularly in the financial services sector. Despite stock market fluctuations, companies still have record amounts of cash on their balance sheets that needs to be put to work. While US corporations’ cash reserves are estimated to have fallen by around 10% by the middle of last year according to Moody’s, that still leaves a US$1.9 trillion hoard.

While dealmakers can look at back at 2018 with a sense of satisfaction, the start of 2019 is likely to see a slowdown until issues such as Brexit have been resolved. However, secular trends in technology will continue to drive M&A across sectors.

Most notably, technological changes such as automation and digitalization, which have been evident for years in the technology, media and telecoms (TMT) sector, have begun to be felt in other industries; for example, Walmart’s US$16 billion acquisition of a 77% stake in Indian e-retailer Flipkart.

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