- November 20, 2019
- Posted by: webo
- Category: Mergers And Acquisitions
M&A will drop by 25%
Global M&A will experience a sharp dip in 2020 due to ongoing global economic uncertainty and the risk of the worldwide recession — the only exception to this trend in North America, where the deal activity will see an increase. Technology, investor activism, and private equity will take center stage in pushing transactions ahead next year. As per the Global Transactions Forecast, M&A value will dwindle worldwide from $2.8 trillion in 2019 to $2.1 trillion in 2020. The IPO proceeds will drop from $152 billion in 2019 to $116 billion, a 23% drop.
M&A Deal Drivers
Three main deal drivers for M&A activity are:
- Technology disruption: Across all sectors, firms will look to acquire improved digital capabilities that they cannot replicate inhouse to stay competitive.
- Activist funds and stakeholder capitalism: Increased priority on stakeholder capitalism will maintain the pressure on boards to restructure and respond, therefore with strategic changes.
- Private equity dry powder: PE firms may take hold of opportunities generated by market volatility and maintain the transaction volumes floating.
M&A transactions will continue to occur. The current deceleration is unavoidable, considering the persisting skepticism around trade and regulations.
Let us analyze how the deal activity will happen across geographies.
The deal activity in North America is intense due to the strength of the US economy relative to Europe and Asia. Additionally, the impact of earlier tax cuts is driving deal activity in the US to date. Some of the headline-making transactions this year include the $84 billion acquisition of 21st Century Fox by Walt Disney, Dupont’s $40 billion spinoffs of Dow, and the $8.1 billion Uber IPO.
North America is anticipated to finish 2019 with $1.5 trillion in domestic and cross border M&A. The deal activity is an 8% drop compared to 2018 — Baker McKenzie’s report forecast $1.1 trillion in 2020.
Investors are worried about high valuations and surging corporate leverage. Further markets are reacting less than favorably to the number of big deal announcements recently. A slump in the US is not likely, but there could be a deceleration in the economy.
The European deal activity is affected due to several factors like a downshift in global trade, Germany’s economic downturn, and of course, the Brexit uncertainty. The enthusiasm for M&A is diminishing in Europe because European governments heightened regulatory scrutiny in 2019. In the equity markets, many European businesses are unwilling to proceed forward with IPO’s in 2019. Hence IPO value has plummeted 60% from 2018 to $15 billion. Concerns about a no-deal Brexit and possible trade issues between the EU and the US will weaken the recovery.
There will be high turbulence in 2020, but the appetite for capital raising will be high. The deal activity will increase in 2021 after Brexit resolution.
Due to the significant contraction in cross border activity, the Asia Pacific deal activity had fallen from highs in 2018. The US-China trade conflict was apparent, as well as sluggish Chinese outbound deals due to Chinese government investigation on outward investment by private firms. Japan has shown to be the anomaly to the slowdown, as conglomerates sell non-core assets, and corporations look for outbound takeovers. Besides, Indonesia, Thailand, and Vietnam have seen healthy inbound activity.
M&A activity will decrease by 18% from $634 billion in 2019 to $529 billion in 2020. The IPO activity will extend its slower trend and will amount to $36 billion, a 43% drop from 2018. Singapore was a bright spot with two broader domestic offerings driving the totals to $2.4 billion from $500 million in 2018.
Next Steps – M&A activity
The factors that will affect the M&A deal activity in 2020 would be
- Trade War Escalation,
- Protracted Eurozone Slowdown,
- US Recession Hits the Global Economy,
- No-deal Brexit, and
- Trade War Fears Fade.
Acquisitions will continue to be an essential growth strategy for businesses worldwide. Economic situations should develop in 2021, and there will be a consequent uptick in deal activity.
Markets now are motivated by various forces, particularly by the influence of technology; one cannot avoid the volatility of markets and the interconnectedness of the global marketplaces.