With a long history of economic cooperation, the US and Western Europe are natural M&A deal partners as both sides look to each others’ markets for expansion opportunities, IP and talent. It’s unsurprising that activity between the regions has been buoyant historically, with more than US$200 billion of deals announced each way for three of the last four years.
Activity in the first three quarters of 2018 was high against longer-term averages, but showed some signs of a cooling trend. US acquirers announced 511 deals involving Western European targets, worth US$164 billion. The largest by some margin was TMT giant Comcast’s US$51.5 billion acquisition of UK-based Sky. The deal had been subject to a highly competitive process after the UK Takeover Panel ordered a blind auction between Comcast and Disney.
Private equity, which has record amounts of capital to deploy (US$1.14 trillion globally as at September 2018, according to Preqin figures), accounted for two of the top five US buyers of European assets in the first three quarters of 2018.
These were Carlyle Group’s US$12.5 billion purchase of AkzoNobel’s speciality chemicals business (now renamed Nouryon), a deal the firm is completing with partner GIC, the Singaporean sovereign wealth fund; and KKR’s acquisition of Unilever’s spreads business, Flora, for US$8.3 billion.
Lower dealflow, despite bright spots
Deals announced in the other direction totalled US$90.7 billion by value across 372 transactions. The top five deals involving a Western European bidder and US target were markedly smaller, with the US$10.8 billion pharmaceutical tie-up of Sanofi and Bioverativ leading the table.
This was closely followed by oil giant BP’s US$10.5 billion acquisition of Petrohawk, the shale oil & gas assets of miner BHP Billiton, in a deal conceived to build the British company’s onshore business in the US. Two of the top five were deals involving IT businesses, attesting to the continued disruption in the sector, with SAP’s US$8 billion purchase of Qualtrics described by SAP CEO Bill McDermott as “transformational”, combining operational and experience data capability, and the US$3.6 billion Atos-Syntel deal struck to boost Paris-based Atos’ North American growth and offer access to new automation technology.
US buyers have remained attracted to Western European assets, with TMT-related businesses by far the most popular sector for M&A. Close to US$70 billion of deals were announced in 2018 through Q3, although the Comcast-Sky transaction accounts for more than three-quarters of this total value.
Industrials & chemicals, followed by financial services, were also in the top three. Among Western European buyers, the US market offered significant M&A opportunity in the pharma, medical and biotech space, accounting for nearly US$20 billion of US targets, with energy, mining and utilities coming in second at around US$14 billion and the consumer sector not far behind.
Despite continued interest between the two regions, it seems likely that 2018 will end with lower totals than those seen last year. US acquisitions of Western European businesses were down in the first three quarters of 2018 by both volume and value compared with the same period in 2017, when 588 deals worth US$196.6 billion were announced. This represents falls of 13% and 16%, respectively.
The drop in Western European activity in the US was significantly more marked by value, with a 37% decline in activity from the US$144.8 billion total in the first three quarters of 2017, while volumes were a little steadier, falling by 7% from the 399 seen in this period last year. It’s worth noting that the full year 2017 value of US$173 billion was a decline from 2016 levels of US$204.88 billion—taken with the totals for 2018 to Q3, the trend for Western European companies buying US targets is downwards.
US political impact
This more moderate activity is set against a backdrop of increasing protectionism. Tensions between the Trump administration in the US and the EU rose over the summer as tariffs and countertariffs were imposed on the trade of certain goods. While an all-out trade war was averted in July, the threat of further tariffs emerged from the US in October.
The US, UK and Germany have all recently increased scrutiny of foreign investment and the European Commission is considering a framework for screening of FDI that will allow member states to control overseas investments that may affect security or public order. Taken together, these moves may be giving executives pause when it comes to cross-border M&A between the US and the EU.
At the same time, the first swathe of president Trump’s tax reforms, approved in late 2017, look set to boost company profits and encourage domestic rather than overseas investment. With further proposals aimed at incentivizing US companies to repatriate cash reserves held overseas, domestic M&A is taking precedence. Indeed, deals involving US buyers and targets increased significantly by value during the first three quarters of 2018 to US$951 billion from US$657.5 billion in the same period of 2017.
Uncertainty surrounding Brexit appears not to have dented confidence in the UK. US bidders continued to flock to the UK, with the country remaining far ahead by value of US bids at close to US$100 billion, way above second-most active market for US buyers, Germany, which saw less than US$20 billion of deals announced. Of Western European economies, the UK was also the most acquisitive in the US, with UK bidders accounting for around US$25 billion of deals, followed by Switzerland and France.
For Western European acquirers in the US, one factor that may well help explain declining activity is rising valuations. While this is a global phenomenon, US prices remain higher than those in Europe. For European M&A deals completed in 2017, for example, EBITDA multiples rose to 7.5x; in North America, they increased to 10.3x, according to Pitchbook figures. This clearly makes US acquisitions a more expensive proposition for European buyers, and may put the brakes on some M&A plans.
M&A activity between the two regions will likely continue at a moderate pace into 2019. Secular trends, such as digitization and automation across industry sectors, will drive company boards to seek new opportunities through acquisition.
And with the tightened foreign investment measures put in place to increase scrutiny mainly on companies domiciled in states considered a security risk—such as China and Russia—there may even be more room for M&A between the US and Western Europe, which traditionally have strong ties and a greater history of co-operation and trust.
But emerging risks may dampen activity through the year. Key among these is Brexit. While this appears to have had surprisingly little impact on M&A activity between the US and the UK, this looks likely to change as the March 29 deadline draws closer and as uncertainty around the eventual deal persists.
As the UK traditionally grabs a significant share of inbound and outbound Western European M&A with the US, a dip in the first quarter of 2019 and potentially beyond could have a material impact on overall values and volumes. In addition, October’s threat of further trade tariffs from the US on the EU suggests trade tensions have not entirely dissipated between the two regions, and this may deter some dealmakers. US companies may well also opt for more domestic M&A, as tax reforms have seen overseas cash repatriated, with UNCTAD suggesting US companies could draw back as much as US$2 trillion.
Economic conditions could also soften M&A totals between the regions. Economic growth is forecast to moderate in the Eurozone (down from 2.4% in 2018 to 1.9% in 2019, according to the European Commission) and in the US (from 3.1% in 2018 to 2.4% in 2019, Congressional Budget Office figures suggest), which may prompt some businesses to look elsewhere for growth.
Overall, the picture for 2019 looks mixed, as commercial logic drives activity while political and economic issues appear to set to lower appetite for transatlantic cross-border M&A.