October 18, 2017
In today’s deals market, about the only thing that’s certain is the seemingly unprecedented level of uncertainty. Events over the past 18 months have consistently threatened to unsettle the economy, disrupt business and, yes, make companies and investors think twice about doing deals.
Yet the numbers tell an interesting and surprisingly positive story. When PwC releases its latest quarterly report of deals activity next week, I’m confident it will once again show more deals being done than last year – domestically and across borders – and that transactions are tracking toward volume highs not seen since boom M&A years.
These transactions include new deal categories, suggesting bold moves as companies go beyond the traditional categories of consolidation, geographic expansion and product category extension. Increasingly, corporate acquirers are focusing on technology and talent as they look to address specific needs in their business models. I believe we’ll also see a new breed of deals, a category I characterize as “reimagination deals” – transactions that represent a need to disrupt entire operating models, head off future competition or completely rethink a business or even entire industry.
The robust pace and changing nature of deals may be a prelude to even more movement. As I discussed at the Corporate Development Conference last week in New York – attended by more than 100 corporate development executives – the dollar amounts of deals have dipped since 2015, but an uptick may be on the horizon. Between many large corporations rethinking their core business models and the potential return of capital to the US through tax reform, we should see not only the return of megadeals – deals that top $5 billion – but the arrival of even larger deals, which I’ll call “gigadeals.”
Surging amid uncertainty
This outlook may be hard to imagine given the sheer amount of uncertainty and disruption in the market today:
- Legislative gridlock continues to roil Washington, with no clear resolutions to debates over healthcare reform and tax overhaul. Meanwhile, there’s confusion at the Fed over the low rate of inflation and future direction of monetary supply.
- Populist rhetoric and the possibility of protectionist trade policies endure not only in the US but other countries. Other regulatory issues have arisen around antitrust, tax and other investment approvals.
- Cybersecurity is a constant risk, highlighted by alleged meddling in elections and a massive breach at one of the world’s largest consumer credit reporting agencies.
- A series of natural disasters is testing industries and supply chains and disrupting the lives of millions of consumers.
- Some markets long considered to be “emerging” have emerged, but in different ways. For instance, China accounts for about one-third of global GDP growth, yet that growth almost entirely benefits China, unlike GDP growth in Western nations.
- Company shareholders concerned about returns and corporate strategy continue to consider activist campaigns to drive significant change.
The number of pressures on business, the economy and society as a whole is head-spinning. We entered 2017 with plenty of questions, which is typical with a new presidential administration. More than nine months later, the picture seems no clearer.
Unfazed: The emergence of new deal categories
Despite this uncertainty, US stock markets continue to post record highs. Asian markets are surging, with shares at 10-year highs. At the same time, private equity fundraising, even with a recent slowdown, is up over last year and on pace for its highest level in a decade.
The healthy markets and increase in deals in this unsettled climate strongly suggest we can retire the belief that uncertainty is bad for M&A, and instead consider uncertainty to be the new normal. While dealmakers may be unfazed, this is somewhat uncharted territory, and transactions are evolving in response. Many traditionally non-tech industries are actively seeking an infusion of innovation, often in response to changing customer behavior. Meanwhile, some established tech companies see potential value in acquiring both tangible and intangible assets in the US and other markets.
Consider Amazon’s purchase of Whole Foods. The driver of this deal isn’t consolidation of similar companies or an expansion into a new market or product line. This is an experiment by Amazon, arguably the king of online commerce, with brick-and-mortar retail. By exploring new types of sales and distribution opportunities, Amazon is reimagining its business. And considering Whole Foods shares surged nearly 30% after the deal was announced, while Amazon picked up more than $10 billion in market capitalization, this type of reimagination deal could soon become de rigueur for other acquirers.
Uncharted: The rise of gigadeals
At $13.7 billion, the Whole Foods acquisition was Amazon’s largest ever. Deals of that size have lagged overall in recent months, but a couple of factors could pave the way for values to rise again.
First, mature industry conglomerates are exploring ways to scale down; we’ve seen this already with aerospace, engineering and pharmaceuticals, and it could happen with consumer goods companies that have multiple brands. These divestitures can help achieve such key objectives as raising capital to reinvest in core businesses, particularly innovation and technology. Selling or spinning off business units also can create more agile organizations and allow management to double down on their attention to core businesses. These types of moves can head off activist shareholders, who started seeking opportunities outside the US last year and may engage even more in overseas markets.
Second, more cash could become available through tax repatriation, with President Trump and other Republican lawmakers voicing support for enabling US companies to bring cash parked in other countries back to the US. While debate lingers over the impact of tax repatriation on job creation, a similar measure in 2004 was followed by an increase in deals the next two years.
Billions in cash from divestitures and overseas, combined with low interest rates and a healthy US economy, could be the recipe for not only more megadeals but the rise of gigadeals – transactions as large as $100 billion. While these gigadeals could represent new directions for some companies, they likely will also be subject to significant regulatory scrutiny. Even so, they represent a new frontier in M&A – another indication of the uncharted landscape facing corporate acquirers today.
Few dealmakers, I suspect, would be unhappy if we gained more clarity around the many murky issues I mentioned earlier. Until then, uncertainty isn’t keeping M&A in check, as companies continue to be aggressive and try to control their own fates when it comes to pursuing growth and finding the right deals.