April 20, 2017
Many things make a market
Q1 2017 deals industry insights
By Brian Levy, US Deals Industries Leader
If the last three months tell us anything, it’s to not take anything for granted.
After deals surged in late 2016 and early 2017, some people expected more of the same as a new presidential administration, perceived to be business-friendly, took office. But early efforts to make big legislative changes, such as repealing and replacing the Affordable Care Act, have run into problems.
So where does this leave the deals market?
Deals market recalibrating prospects for administration’s overhaul agenda
The administration is moving ahead with its policy reform agenda on its own where it can, particularly in energy and on internet regulations. But the setback on healthcare has raised questions about prospects and timing for other potentially deal-friendly measures. A corporate tax overhaul, for instance, now might be pushed back later than the administration’s self-imposed August timeline.
This uncertainty calmed an initially excited stock market, as both the Dow and S&P leveled off abruptly in March. For deals, though, it’s a more nuanced picture.
Deal volume up, while deal value holds steady
Overall, US deal value for the quarter barely budged year-on-year, with the $335B total almost identical to the $334B in Q1 2016. But deal volume jumped noticeably by 14% compared to this time last year. That’s a difference of about 450 deals.
Following the November elections, some dealmakers may have held off on deals until 2017, anticipating favorable changes with the new administration. Industries that helped drive the higher number of US deals include technology, consumer markets, and oil and gas. While those sectors saw brisk activity, others saw deal volume slip from a year earlier. (Find more Q1 2017 deals industry insights at pwc.com/us/deals-industries.)
Although overall deal value was stable and volume increased, megadeals worth $5B or more dipped. The value and volume of those were down by 29% and 44%, respectively. This was offset somewhat by increases in middle market deals – transactions with a value of less than $1B – with value up 10% and volume up 14%.
While the trends in megadeals and middle market deals are important, the overall volume increase in Q1 2017 compared to Q1 2016 indicates the market is holding steady.
US businesses eye foreign targets
Cross-border deals paint a similarly mixed picture. The value of inbound US deals is down sharply by 45% compared to Q1 2016, but volume is up 6%.
Various factors could be at play here. A strong dollar bumps up already high valuations and places an additional premium on US assets. A recent report from CNBC indicates that the Chinese government is exerting more pressure to contain capital outflows, some of which has been fueling the US deals market. And a potential US foreign policy shift with the new administration also could hamper overseas buyers.
Meanwhile, outbound deals have gone in the opposite direction, with value more than double what it was in Q1 2016 and volume dropping by 7%. Continuing uncertainty at home and a brightening European economic outlook could shape this dynamic further as US businesses look abroad for acquisitions, considering some non-US markets to be “on sale.”
So the political mood, both in the US and beyond, affects deals. But other influences also are at work.
Stalwarts have to modernize
Regardless of what happens in Washington, market forces may ultimately win out. Established, “traditional” businesses still need to reinvent themselves to survive. And that process often means deals.
The sobering situation in the retail industry underlines that. In Q1 alone, nine US retailers filed for Chapter 11 bankruptcy – as many as in all of 2016. And more may struggle if they don’t adapt fast enough to shifting customer preferences or get a big enough share of the growing online market.
As in other sectors, technology could help them modernize. With retail, that could mean further meshing their brick-and-mortar and online offerings. Or it could mean making the location-based shopping experience more attractive, from putting virtual fitting rooms in clothing stores to making sure popular items are always in stock.
So what’s next? Which sectors could find themselves in a similar situation? Far-sighted industrial products and manufacturing businesses are already embracing artificial intelligence, automation and the Internet of Things. But what about those who are slower off the blocks?
Other factors hold clues for the future
In a stable market that’s not moving dramatically one way or the other, we can look at different qualitative and quantitative indicators to anticipate how they’ll affect upcoming deal activity.
Economic data is generally sound: Business and consumer confidence is at a post-recession high. Unemployment is low at 4.5%. And even though the economy didn’t create as many jobs as expected in March, anything below a 5% unemployment rate usually inspires confidence.
Interest rates are still low: An increase in the interest rate would typically create headwinds for the deal market. But despite a quarter-point rise and the potential for others, rates remain at or near historic lows.
Valuations look high: High prices mean higher risk and more due diligence as buyers try to be certain that deals represent value – or are worth pursuing at all. This caution hasn’t significantly slowed deal activity, but high valuations may have contributed to a dip in Q1 private equity deals, which declined 6% from the year before, while deal value plunged 36%.
IPO is changing: Despite an uptick in activity compared to Q1 2016, Q1 2017 was the second slowest for IPO activity in six years – even with a buoyant economy, a strong stock market and low interest rates. But liquidity in the private company market has increased to the point where companies may not rely on IPOs as much as before. Some sectors, like technology and energy, are still seeing more IPO activity than others. But considering the drop-off in public filings in recent years, IPOs aren’t the reliable indicator of deals activity they once were.
What do you see shaping the deals market in Q2? Share your thoughts in the comments section.
Be sure to check out the industry report highlights below and the full reports on PwC’s deals industry insights webpage.
Figures above based on analysis performed on data available as of April 3, 2017. Source: Thomson Reuters with PwC analysis.
Industry deal highlights
Aerospace & Defense (Global)
“Despite a relatively soft start to the year, we are optimistic that deal activity will recover and return to prior year levels. Defense spending increases and geopolitical factors will certainly play a part in the prevalence and magnitude of deal making through the rest of 2017.”
—Bob Long, US Aerospace and Defense Deals Leader
Asset & Wealth Management (US)
“The asset and wealth management industry is at an inflection point. There are many existential threats for small and medium-sized firms without differentiators. To deal with these industry threats, these firms need to seriously evaluate suitable partners they can merge with, in order to allow the owners and investors in such firms to preserve value.”
— Samiye Yildrim, US Asset Management M&A Leader
Banking & Capital Markets (US)
“Regional and community banks should be strategically positioning themselves for consolidation by focusing on core capabilities to capture synergies, execute value-creating deals and attract the capital base to allow investment in digital transformation. Our BCM Strategy and Deals teams are working together with many organizations on these strategic priorities.”
—Scott Carmelitano, Deals Valuation Partner
“Global chemical companies continue realigning their portfolios to enhance shareholder value amid stagnating demand, profitability and growth. Under an increasingly uncertain macro and political environment, we anticipate top-line growth and margin improvement through M&A will continue to be a feasible solution for many companies.”
—Craig Kocak, US Chemicals Deals Leader
Consumer Markets (US)
“We expect the positive momentum in the Consumer Markets deals sector to continue, driven by evolving consumer demands, the increasing impact of online retailing and other competitive factors.”
— Dominic Ricketts, US Consumer Markets Deals Leader
Engineering & Construction (Global)
“Q1 2017 M&A activity decreased to $12 billion, which is the lowest level in the last three years. While there are some seasonal influences on the first calendar-year quarter in any year, the drop in Q1 2017 was far more pronounced than in previous years, suggesting ongoing levels of heightened market uncertainty, as well as tempered demand from Asia and specifically Chinese investment.”
—Colin McIntyre, US Engineering and Construction Deals Leader
Entertainment, Media & Communications (US)
“Despite certain regulatory uncertainties, we remain optimistic that M&A activity in the EMC sector will continue on a robust pace for the foreseeable future.”
—Bart Spiegel, Partner, Entertainment, Media & Communications Deals
Health Services (US)
“Stability in announced transaction volume continued through Q1 2017 despite increased uncertainty on the healthcare reform front. Additionally, conversations around alternative transaction types and structures (e.g. JVs, affiliations, etc.) remain active in many markets.”
—Thad Kresho, US Health Services Deals Leader
Industrial Manufacturing (Global)
“Unanticipated geopolitical and economic uncertainty coming out of the first quarter of 2017 have the potential to create formidable headwinds for dealmakers for the balance of 2017.”
—Paul Elie, US Industrial Manufacturing Deals Leader
“Following a slight uptick in Q4 2016, the Metals deals market declined in the first quarter of 2017. Overall, the value and number of deals declined compared to the prior quarter. The majority of Metals deal activity in Q1 2017 was attributable to strategic investors who made up 66% of deal volume and 75% of deal value.”
—Brian Kelly, US Metals Deals Leader
Oil and Gas (US)
“As we forecasted, 2017 M&A activity started at a blistering pace, with $49 billion of announced deals in January alone – 40% higher than the total for any of the previous first quarters since 2010. As the quarter progressed, we sensed a little bit of a pullback as we exited the quarter. Did seller optimism get a little ahead of the market? Did we have a little too much enthusiasm for the recovery and for what that enthusiasm meant for valuation?”
— Doug Meier, US Oil & Gas Sector Deals Leader
Pharma & Life Sciences (Global)
“While market uncertainty, pressure on drug pricing and higher share prices slowed down deal making, the rationale for completing deals continues to be as strong as ever. As sector-specific uncertainties are either resolved or mitigated, it should be easier for buyers and sellers to agree on deal values which will lead to greater deal activity.”
—Dimitri Drone, Global Pharma & Life Sciences Deals Leader
Power & utilities (North America)
“Inbound deals returned to the forefront this quarter, as opportunity to seize on growth aspects of changing supply makeup and infrastructure support in the US attracted continued interest.”
— Jeremy Fago, PwC US Power & Utilities Deals Leader
“With four deals over $1 billion and more than 200 transactions in the quarter, Software eclipsed all other sectors. With Q1 as an optimistic indicator, we expect 2017 to be a very active year for tech M&A.”
—Todson Page, US Technology Deals Leader
Transportation & Logistics (Global)
“Strategic investors continue to lead deal activity across both value and volume, as companies look to M&A as a solution to stay competitive in a very dynamic sector.”
—Darach Chapman, US Transportation and Logistics Deals Leader