At the start of May, John Sinclair Foley, Reuters Breakingviews’ US Editor, discussed the state of global dealmaking in 2019 in the webinar ‘Trends in M&A and Capital Raising’. Matthew Toole, Director, Deals Intelligence, explores the webinar highlights, and asks: what are the reasons behind the slowdown in dealmaking activity?
- With regard to the state of global dealmaking in 2019, it’s fair to say that the first quarter has not surpassed expectations.
- One symptom of this slowdown is that investment banking fees were down 14 percent year-on-year.
- Among the most notable dealmaking trends is that M&A is flat while most other parts of the capital markets are registering hefty declines.
The state of heightened anxiety that ended 2018 has continued to affect dealmaking in 2019, with a general sentiment that markets may be peaking and that the effect of US tax cuts is wearing off.
In contrast, there are few obvious signs that a correction is imminent. GDP figures remain robust and, so far this earnings season, around three-quarters of companies have beat analysts’ estimates.
Curiously, when it comes to capital markets, the discrepancy between data and anecdote is reversed. John says that bankers are still reporting very healthy pipelines, but that’s not reflected in the number or value of completed transactions.
John says: “There are plenty of signs that people fear things will weaken substantially, and that the party is going to end quite soon.”
In some ways, this is to be expected, given we are seven years into an M&A and investment banking bull market that followed the global financial crisis. The question is not so much whether the market will slow, as whether it will end with a shock or gradual decline.
Dealmaking in 2019: the hard facts
For the year to the end of April, worldwide M&A is down 20 percent compared with the same period in 2018. The number of mega deals (more than $5bn) have halved in value.
Europe is down 60 percent, Britain is clouded in Brexit-related uncertainty, while the China outbound story has fallen off. In contrast – and this muddies the general story of anxiety above – the US economy is still growing pretty fast, and, for now, enjoys a political and regulatory environment that is tolerant of large companies getting larger.
As a result, the Americas took a 57 percent share of the global action – indeed, in Q1, eight of the ten largest deals were US domestic transactions.
This also reflects a dramatic pull-back in cross-border activity, which is down 52 percent year-on-year, representing just one-quarter of global dealmaking in 2019, the lowest proportion for 15 years.
The headlines about risks to global trade over the past six months are now finding their way into the data.
It’s not just the big headline deals that are in retreat. The first quarter represents a six-year low in overall deal volumes, underscoring a widespread lack of confidence that chimes with Refinitiv’s Deal Makers Sentiment Survey at the start of the year.
Dealmaking in 2019 becomes creative
There may be fewer deals, but there are still “interesting and aggressive” M&A situations in play.
While not a huge sector, the growing trend for cannabis-related investments is illustrative of the creativity being applied to dealmaking in 2019, where deals are being agreed that are only consummated if and when the US federally legalizes the drug. In such situations, acquirers are taking very aggressive views on valuations and finding neat ways to get around legal issues.
In other words, advisers are stretching to do deals that make sense as volume falls. Meanwhile for CEOs, the stakes are increasingly high. Shareholders are increasingly vocal about the utility of corporate activity.
Even in sectors such as banking, which are highly fragmented and where synergies make commercial sense, shareholders have punished companies and driven down share prices.
In other situations, institutions have issued press releases condemning proposed takeovers. The potential for such embarrassment is surely a major deal killer.
There are also signs that US political tolerance of mergers is thinning out, with opposition in Congress to industrial no-brainers, such as the proposed merger of SunTrust and BB&T, two mid-sized banks.
One group of dealmakers that won’t be fazed by PR risk are private equity investors, who have had two strong years for transactions, on the back of many years of rapid capital accumulation.
These buyout investors are more concerned by toppy valuations and high leverage, even if loose lending standards are providing their companies with outrageously good terms.
Capital markets slowdown
Fees from debt and equity capital markets were down by two-thirds, year-on-year in Q1, with IPOs down by almost half to a three-year low.
John doesn’t pull any punches on how he sees the new issue market in the US. It’s a “freak show” that is fixated on loss-making and high-growth stocks, while companies that actually make money are avoiding coming to market, given the growing number of alternatives.
Anecdotally, he says funding from SoftBank now comes with greater kudos than a public listing.
Certainly, Q1 data by stock exchange shows Hong Kong is the only market with a steadily rising IPO business. Nasdaq still leads by proceeds, but overall Western exchanges seem to be on the decline, while the volatility of Shanghai defies simple conclusions.
Tech, debt capital and emerging markets
Here’s one for data fans: does it still make sense to lump any tech-enabled business in the ‘technology’ sector? Zoom, the video conferencing company, looks techie, but how about Lyft, WeWork, Pinterest? With Walmart investing more into tech and Amazon expanding offline, is tech just becoming a catch-all marketing term, bereft of meaning for investors?
In fact, could the same be said of emerging markets, which lumps in all of Asia and Saudi Arabia, while parts of Europe are arguably beginning to ‘submerge’? In any case, times will be tough for emerging markets so long as the US economy continues to dislocate from anaemic global growth.
Global debt capital markets achieved an unspectacular 7 percent fall in activity in Q1. We are the very start of a new interest rate era and have so far witnessed a slight pull back in the US dollar market. Many companies had refinanced when rates were very low, and large corporates who came to market just because they could, are now retreating. There remains huge demand for corporate debt, even at high levels of leverage.
Changing winds for US dealmaking?
So how long will the party in the US continue? With 2020 presidential elections on the horizon, there may be a change in the wind regarding the political tolerance of big business.
Several Democrat senators have their sights firmly on big tech, and not just with regard to potential mergers, but also long-completed acquisitions that are deemed not to be in the consumer interest. But it can be easy to latch on to a few specific negatives.
The big picture in the US remains surprisingly positive for so late in the cycle. It can’t defy the global economy forever, but by that time there may be other growth stories afoot.
Join us on 16 May for our upcoming Refinitiv webinar on dealmaking and Brexit.
Our guest speakers will explore the ins and outs of UK dealmaking, the relationship between Brexit, M&A and capital markets, and what outcomes we can expect as talks are ongoing.
Has Brexit indeed impacted UK dealmaking and how has the landscape evolved since the referendum? Will UK companies become less attractive acquisition targets as our Refinitiv 2019 annual Deal Makers Sentiment Survey suggests?