Clouds appear on horizon, but M&A outlook remains strong

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A new survey confirms the widespread expectation that global M&A activity will remain strong into the first quarter of 2018, but also points to sometimes unexpected variations across different regions and to some emerging threats which need to be watched.

The latest quarterly survey by the enterprise content management provider Intralinks suggests that global M&A volumes will rise by around 2% in the first quarter of 2018 compared to the already exalted level of the first quarter of 2017. Intralinks has an excellent reputation for the accurate prediction of deal flow around six months in the future, based on its role of providing virtual deal rooms for many of the world’s leading M&A practitioners.

Within that 2% figure the Asia Pacific region emerges as being likely to show the strongest growth, with deals expected to be up by 14% on the equivalent quarter last year. Almost all areas are expected to be strong, with China, Hong Kong and South Korea leading the upswing. Intralinks also notes that Japan is showing a return to growth in early stage M&A, in a way that it has not achieved for more than a year.

Europe, the Middle East and Africa (EMEA) are also set to see good growth, of around 6% according to Intralinks’ figure. This is despite continuing sluggishness in the UK, one of the most important countries in the region for deal flow, and less predictably also a slowdown in Germany, usually another vital contributor. But these declines are counteracted by a strong outlook across most of the rest of the region, with Intralinks emphasising the positive outlook in Spain and Italy and across Northern and Eastern Europe, as well as in Africa and the Middle East. All these places are expected to show double digit growth, with the Materials, Real Estate and Healthcare sectors to the fore.

Latin America has been often been patchy in recent years, but the outlook there has now improved for the fourth quarter in a row according the report, with deal flow expected to rise by 3%. Intralinks points to increasing consumption in Brazil and Colombia, economic reforms in Argentina and energy sector liberalization in Mexico as particularly positive factors. Healthcare, Technology, Media & Telecoms (“TMT”) and Financials sectors are predicted to lead the growth.

Only the US is expected to see a material fall compared to the same quarter of last year, but Intralinks makes the point that the first quarter of 2017 was especially strong in the US. The expected 11% fall more reflects a particularly tough comparative than a real fall in the US M&A market. However, Intralinks does point to concerns about changes to free trade agreements with Mexico and Canada as being a source of real uncertainty, which seems to be affecting deal flow. It also makes the point the turn in the US interest rate cycle, which is ahead of most of the rest of the world, seems to be having a dampening effect.

Indeed the message of concerns about free trade in North America should perhaps be monitored with care. The global outlook is evidently quite upbeat, but Intralinks does issue a warning that there are clouds on the horizon. Apart from the fact that valuations are high and the cycle is now unusually long-lived, they most obviously take the form of an upturn in economic nationalism, protectionism, restrictions on global trade and cross-border economic integration. Intralinks warns that all of them have the potential to affect deal making sentiment negatively, and that if there is a correction in markets they would exacerbate the impact.

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