The future of the deal

The beginning of a new M&A season

The wind of change is underway – from a rise in shareholder activism and the return of private equity to the threat of disruptive innovation and potential trade wars – these themes are expected to have a major impact on the M&A markets.

Themes that will impact the M&A markets

After four consecutive years of crossing the $3 trillion annual mark, the M&A market continues to surpass expectations, it crossed the $1 trillion mark within the first three months of 2018, the fastest ever pace. Which themes will have a major impact on the M&A markets?

1. Getting divestments right

Companies have completed record levels of acquisitions and as part of their value creation process, are actively realigning their portfolios and divesting non-core assets. But most report it is not easy to realise the anticipated returns. Deloitte research shows that seven in ten firms are preparing an operation for sell off. Such moves are essential as businesses come under significant pressure to reduce costs, focus on core activities, and address major changes in consumer habits. In addition there is considerable pressure from the threat of activist shareholders who are now active both sides of the Atlantic and have been demanding companies divest off non-core assets. 

The future of the deal

2. Private equity deals

Private Equity (PE) have amassed record levels of capital and the pressure to deploy is growing. In 2017, we saw the highest levels of PE deal activity since 2007 and we expect this trend to continue.

PE firms have been particularly active in targeting portfolio divestments of the corporate sector. Competition for assets is increasing and driving up valuations and deal multiples, pushing PE firms to take on leverage not seen since 2007.

At the same time, the threat of disruptive innovation means PE needs to look beyond financial engineering and cost reduction to create value. They need to invest in digital technologies, analytics and other technologies to optimise their acquisitions for successful exits.

3. US Tax Reform

The 2018 US Tax reforms brings the corporate tax down from 35% to 21%. There is also a significant tax reduction for American firms who return their overseas earnings to the US (that bill will go down by more than half to 15%). With US firms estimated to hold over $1.4 trillion of cash and liquid investments offshore, companies should model the effect of profit repatriation, and of domestic versus foreign acquisitions.

We expect this will give a boost to a range of activities, such as debt repayment, shareholder dividends, share buybacks and also M&A activity.

A recent Deloitte survey of M&A professionals tells us that 60% of the respondents expect the rate reduction and the repatriation tax will have a significant impact on their M&A plans. We expect this should give a boost to divestments, as companies look to siphon off less profitable or non-core activities. Lower taxation on capital gains will make it easier for companies to sell assets at lower cost.

We expect companies will need to invest significant time and resources into modelling the impact of the changes and ensure they are able to take advantage of this unique opportunity.

4. Disruption

Companies are challenged for growth in their traditional businesses, making it imperative for them to innovate and create the “businesses of tomorrow”.

Across all sectors, companies are using M&A and corporate venturing to capture such opportunities. We estimate companies spent $634 billion on disruptive innovation acquisitions and investments between 2015 and 2017.

This race to acquire innovation has unleashed a major shift in M&A markets – last year around 60% of technology enabled assets were acquired by the non-tech sectors.

Corporate venturing has emerged as a fundamental part of the corporate innovation strategy, providing companies with an important conduit into the external innovation ecosystem. Beyond financial returns, these investments provide invaluable access to new technologies, business models and talent, all elements crucial to growth through innovation.

More information?

Do you want to know more about the future of the deal? Please contact Andrew Busby, Konstantin Von Radowitz or Jean Francois Lagassé via the contact details below.

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