M&A between US and Western Europe stages recovery in 2019

After signs of a cooldown in 2018, the M&A corridor between in the US and Western Europe is staging a comeback despite challenges

In the first nine months of 2019, cross-border M&A between the US and Western Europe totaled US$312.7 billion, a 12% increase on the same period in 2018, while volume dropped 13% to 866 deals. This is against a backdrop that saw global M&A fall 14% by value and 15% by volume over the same period.

Whether this recovery will continue into 2020 is contingent on a number of geopolitical factors, many of which are difficult to predict at this time, including US-EU trade tensions, increased scrutiny on foreign acquirers on both sides of the Atlantic, Brexit and the 2020 US elections.

Western European acquirers announced US$128.7 billion of deals involving targets based in the US in the first three quarters, a 35% increase on the same period the year before. In fact, the first three quarters of 2019 have registered higher M&A value than the entirety of 2018, which had been the lowest year since 2013. Volume in Q1-Q3 2019 dropped 13% on the corresponding period in 2018.

Outbound M&A from US-based bidders targeting firms based in Western Europe has stayed steady, totaling US$184 billion in the first three quarters of 2019, only slightly under the 2018 Q1-Q3 total. Volume over that period fell 12% to 506 deals. The high overall value figures in the past few years have been buoyed by megadeal activity.

PE activity pushes up overall figures

Once again, PE deals helped ensure healthy total numbers in the transatlantic deal corridor. Six out of the top ten deals in the first nine months of this year involving US-based bidders and targets in Western Europe were PE buyouts.

While only one deal in the top ten this year involving bidders based in Western Europe and US-based targets was a PE buyout, the largest deal of the year was a PE exit: KKR’s planned sale of financial data provider Refinitiv to London Stock Exchange Group for US$27 billion.

Total PE deal activity involving US bidders and Western European targets was US$61.3 billion in the first three quarters of this year, a 33% drop on the same period last year. However, 2018 was an outlier year, with the highest annual figure on Mergermarket record for PE activity involving US-based bidders and targets in Western Europe.

Looking at PE activity going in the other direction, US$59.1 billion in PE deal value was announced in Q1-Q3 2019 involving Western Europe-based bidders and US-based targets—a 158% increase on the same period the year before.

PMB and TMT drive deal activity

Megadeal activity in the pharma, medical and biotech (PMB) sector was a strong driver of transatlantic deal value. PMB deals involving US bidders and Western European targets totaled US$98.2 billion—or 53% of the total value of all such deals—over the first three quarters. Volume fell 14% over the same period, to 51 deals.

From Europe to the US, TMT was the strongest-performing sector in the first nine months of the year by value, with US$42.8 billion recorded—a 269% increase on the same period in 2018. Volume dropped slightly, from 104 to 97 deals.

Total TMT value was boosted significantly by the US$14.1 billion buyout of network infrastructure group Zayo by a PE consortium comprising US-based Digital Colony and Sweden’s EQT. German semiconductor firm Infineon’s US$9.3 billion acquisition of US-based Cypress Semiconductor (both deals including net debt) was another significant transaction. Both transactions are pending regulatory approval.

Challenges ahead

After a few extraordinarily buoyant years, the global M&A cycle is likely past its peak, and while the transatlantic deal corridor has had a strong 2019 so far, there are a number of geopolitical uncertainties that could throw a wrench in the works.

For one, trade tensions between the US and the EU flared up again in October, as the World Trade Organization approved US tariffs on US$7.5 billion worth of European products in retaliation for European subsidies to Airbus that the WTO had ruled were illegal. While talks have begun, both sides are also awaiting the WTO’s decision on a parallel case, brought by the EU, on whether the US illegally subsidized its own aerospace champion, Boeing.

In the meantime, the European Commission separately adopted a new regulation providing a framework on foreign direct investment screening earlier this year. The new regulation, which will come into effect in October 2020, will create a cooperation mechanism between member states and the EC.

While the new framework does not appear to be aimed at the US, increased scrutiny could be placed on non-EU bidders of all types.

The UK, for example, last year released a White Paper on national security and foreign investment. While the outcome of the review is still awaited, in the meantime the UK government introduced some short-term measures relating to military and dual-use goods, computing hardware and quantum technology.

Already this year, the government has intervened in two deals on national security grounds—both involving US PE firms targeting UK companies in critical industries. The first, a US$5.5 billion (inclusive of net debt) takeover of satellite firm Inmarsat by a consortium that included US-based Warburg Pincus, has received the go-ahead from the UK government. The other, Advent’s US$5.2 billion proposed takeover of Cobham, is still under review.

Given that the growth of the global economy is slowing, and the M&A cycle is correspondingly cooling down, the deep relationships and familiarity dealmakers in Western Europe and the US have with one another’s markets could ensure that the transatlantic deal corridor will remain resilient.

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