A whole host of factors seem to have come together at the same time to ensure that the first quarter of 2018 was one of the strongest quarters on record for M&A, with US$1.2 trillion of deals making it the most productive first quarter in terms of value ever seen.
As we said on April 4, although a relatively small number of mega-deals greatly enhanced the numbers, with US$600bn, or 57% of the total, accounted for by deals with a value of more than US$5bn, the surge was widely spread across all continents. Nor is the number artificially swollen by one or two especially large deals. There were as many as 49 global deals of more than US$5bn in the quarter, itself a record for one quarter.
There seem to be a number of readily identifiable factors which have caused the floodgates to open, and in the absence of an unexpected shock, it seems more than usually likely that the strength will persist for the rest of the year.
Anu Aiyengar at JP Morgan Chase emphasises a point felt by many in highlighting the importance of US tax reform in clearing an impediment that had held back many deals. Aiyengar says:”The clarity on tax has unclogged some of the M&A activity that was strategically imperative, but companies were waiting for the right financial timing.” This clarity seems particularly evident in a number of healthcare deals, and is an evident reason for the upsurge.
An important aspect of that financial timing that Aiyengar refers to seems to be the recognition that the interest rate cycle has turned in the US, and that the era of abnormal monetary stimulus is ending elsewhere. While few expect interest rates to rise quickly in the US, and in Europe abnormally rates are still likely to remain for some time, it is increasingly clear that rates will be higher in a couple of years in many places than they are now, in a way that has not been true since the global financial crisis. That provides an incentive to do deals and lock in long-term rates which may not be available in six months or a year.
Of course, this monetary tightening is partly a reflection of improved global confidence, which seems to be a major reason for the growth of cross-border deals. At US$520bn, the value of cross-border deals was up 67% on the same quarter of last year, and, again, the strongest first quarter since records began. Borja Azpilicueta, at HSBC particularly highlights the improved confidence in Europe, and fears about the Chinese banking system also seem a distant memory for most.
Meanwhile, the requirement for private equity to deploy its “dry powder” becomes ever more urgent. Paul Hammes at EY recently suggested to Acquisitions Daily that private equity has as much as US$628bn of capital to deploy. In some cases limited partners and shareholders are starting to become more restive at the amount of capital, which is earning paltry returns while it waits to be invested, and the hunger for deals is evident in the interest of private equity in an increasing number of even very large deals.
And then, there remains the increasing impact of technology and the disruption that it is causing, which means that almost all companies now need to look at their strategic needs regularly, and often see M&A as the only solution to their problem. Thomson Reuters data highlights that Energy & Power, Industrials and Healthcare were especially strong in the first quarter, with Azpilicueta talking of a complete reshaping of the utilities market.
Pessimists point to tightening regulation and the seemingly irresistible growth of protectionism as areas of concern. But the regulatory regime seems to have more consient and more predictable of late in many places, so that although if it is onerous, dealmakers feel more confident at making educated guesses as to what will be allowed, and in the context of dealmaking, protectionism creates more headlines than it prevents announced deals.
The clear message seems to be that the strong quarter was no flash in the pan, and that the outlook for at least the next several months remains distinctly healthy.