The M&A global market remained vibrant in 2017 with transactional volume coming in just under the 2016 level – 2017 was the fifth most active year in terms of global deal volume.1 Global interest rates remain at historical lows, notwithstanding the slight increase in US rates. Roughly 15,000 deals transpired in the US, the most in a year since the beginning of the new millennium, with cross-border deals accounting for 30% of total deal volume (down slightly from 36% in 2016). In its May 2018 global outlook, the Organisation for Economic Cooperation and Development (“OECD”) forecasted G20 growth rates of 4% and 4.1%, respectively, for 2018 and 2019 and forecasted non-G20 country growth slightly under 4% — encouraging forecasts all around.
The unprecedented M&A cycle in which we find ourselves shows no signs of slowing halfway through 2018, either. According to Thomson Reuters, the number of deals exceeding USD5 billion in value in 2018 will double from 2017. Relative to 2017, overall M&A deal volume may have declined so far this year, but deal values have risen.
Although global economic strength clearly is providing fuel to this hot deal market, the following key factors are also fanning these flames, encouraging active market participants to continue engaging in M&A and those sitting on the sidelines to abandon their wait-and-see approaches:
United States Tax Reform: The largest US tax overhaul in more than 30 years provides a reduced top US corporate income tax rate, dropping from 35% to 21%. In addition, the new law taxes, albeit at a reduced rate, overseas earnings that were formerly taxed only upon repatriation, potentially making it less costly to repatriate offshore cash. Moody’s estimated that at the end of 2017, US companies were holding roughly USD1.4 trillion in offshore cash; if repatriated, these large cash reserves will likely boost corporate involvement in M&A and potentially whip up the already frothy valuations the market exhibits.
Private Equity Dry Powder: High levels of dry powder available to financial buyers will also continue to contribute to the deluge of M&A activity. Data from Preqin suggest that PE funds held roughly USD1.1 trillion in cash at the 2018 mid-year mark. With such a cash hoard, funds should be well-positioned for the foreseeable future in M&A, whether competing with corporate buyers or making opportunistic investments in the event that a trade war or other market turbulence materializes.
Brexit and European Elections: Notwithstanding continued media noise around the UK vote to exit the European Union (“EU”) and the need for the various governments to agree on the details of their prospective trade relationships, the powers that be appear to have constructed at least an outline of the path forward and largely alleviated the main concerns. The dissipation of such fears and the anticipation of a strong UK economy, should boost the European markets in the near- to mid-term. Further, recent election wins in key European countries by political parties espousing conventional views should encourage and provide confidence to the markets as the European economic recovery continues.