April 11, 2019
By John D. Potter, US Deals Sector Leader
The pursuit of competitors, growing demand for new tech capabilities and a heightened focus on investing in core businesses translated into many noteworthy deals in early 2019 and suggest similar activity in the months ahead. Companies in several sectors continued to make big moves to increase scale, while others used smaller – but still significant – transactions to explore new markets or ways to connect with customers.
The economy is front of mind for many companies across industries, presenting something of a mixed bag for M&A. The current cycle remains steady, and the availability of capital – cash and affordable financing – has enabled some acquirers to take action, including megadeals of at least $5 billion in value. But concerns about a downturn in the next year or two may have muted some aspirations, especially in cases of high valuations.
Three things we’ve seen so far in 2019
- Megadeals within many sectors: US deal volume may be down overall compared to a year ago, but the pace of high-dollar transactions is steady. Pharmaceuticals, financial technology, health insurance, banking and automotive all saw megadeals announced in the first quarter. While some of these were well north of $20 billion in value, other, smaller megadeals still represented historically large investments for those companies. The high multiples we’re seeing in many sectors are resulting in privately-held companies that you normally might not expect to be for sale instead coming into the marketplace. Among smaller deals, a large percentage continue to cross sector lines, often for tech assets.
- Strategic divestitures, and now security concerns: We’ve seen multiple instances of major players making a case for a divestiture that can allow them to refocus capital on growth opportunities. There’s a realization that cost efficiency alone isn’t the path to growth and that long-term success comes from focusing on where to invest dollars and get returns on them, from automotive companies adding new technology to consumer businesses reviving major brands. And now security issues may play a role in certain divestitures: The Committee on Foreign Investment in the United States (CFIUS) has increased scrutiny beyond M&A and recently flagged China-based owners of US companies that collect personal data.
- Cross-border deals adapt, and tech still a target: Speaking of cross-border issues, companies within and outside the US are adjusting their deals strategies in light of government sensitivities. But it’s not holding back cross-border deals overall, with companies in various sectors willing to look for investment beyond regions such as Canada and the UK. These have included pure competitor/market plays but also deals by non-tech companies for emerging technology capabilities. Such moves can be larger-than-usual investments but represent bids to bring more innovation to customers.
Three things to watch in the months ahead
- Big names and not, IPOs have an opening: PwC’s latest Capital Markets Watch noted that IPO volume and value were down in the first quarter, which is understandable given the three-week US government shutdown and some slowing economic indicators. But average IPO returns have outpaced the S&P 500, led by financial services and consumer markets, and some high-profile and other IPOs are in the near-term pipeline. The number of unicorns is growing – almost half are in the US – and investment appetite isn’t limited to corporate and private equity. With a resilient economy and no shutdown-like events in the months ahead, pharma, tech and other sectors, along with increasingly popular special purpose acquisition companies (SPACs), should help spur a rebound.
- About the economy … : Predicting the ebbs and flows remains a popular pastime, and each month seems to float more clouds in the forecast. The inflation rate, yield curve inversion, unemployment, hiring, wage growth … all are in the mix as economists weigh the length of this already-long cycle. Two factors should keep M&A stable: the various sources and amount of capital available for deals, which are increasingly less dependent on the overall economy, and the potential for a downturn to occur later than expected in 2020 or beyond. Further fuel for investment could come from the Fed sticking to its plan of no near-term rate increases, as well as any resolutions to trade disputes.
- Striking the right balance in deal size: If volumes do tick up, the recent procession of megadeals could be joined by more modest transactions, and for reasons that vary across sectors. Smaller deals are already happening in sectors such as technology, where high multiples might lead some buyers to place smaller bets in a few places instead of pursuing a megadeal. Meanwhile, companies in industries that have seen large, transformative deals, such as media and telecommunications, now could look to smaller acquisitions that can address pockets of needs and help execute that transformation.
Other developments are influencing deal decisions in certain sectors. Executive turnover at some companies seems to have fed recent motivation for M&A. Tariffs and trade issues are leading automakers to consider strategic alliances instead of acquisitions as a way to share the cost of some investments.
As they navigate factors specific to their industries, businesses in general likely will continue eyeballing the economy. If it ends up tightening sooner rather than later, caution will be in the cards. But a dip in valuations combined with the continued access to cash and financing could allow some acquirers to capitalize and position themselves for the next positive cycle.
For more details on Q1 2019 deals activity, including individual sector reports, be sure to visit PwC Deals Industry Insights on April 25.