Here Are the Biggest M&A Trends to Watch in 2020Author: iDeals
Experts in mergers and acquisitions are cautiously optimistic as the calendar turns to 2020. Some industries expect strong M&A activity, while others are prepared for a downturn, particularly among the biggest deals.
In late 2018, 65 percent of senior executives were optimistic about M&A. One year later, that number dropped to 33 percent, CFO’s David McCann reports. Yet significant available capital, low unemployment and solid corporate earnings have many business leaders hopeful that 2020 will be a good year for mergers and acquisitions.
Still, economic and political upheavals are raising concerns. The risk of a global economic slowdown and the impact of political activity like the recent U.K. election and the 2020 U.S. presidential election may affect business decisions throughout the world.
Two Industries Expecting Strong M&A Activity in 2020
Mergers and acquisitions forge ahead in a number of industries. While technology will play a role in nearly every industry’s M&A decisions, businesses in beauty and healthcare are already more active in this space than others, and they are likely to remain so into 2020.
Cosmetics companies are poised to continue seeking deals that will allow them to leverage some of the biggest sea changes in the industry, from sustainability demands to the popularity of celebrity-branded beauty lines as investments.
“A successful, profitable brand attached to an in-demand celebrity, especially one leading the way in the digital millennial space, will continue to be desirable for large conglomerates,” says Natasha Koifman, co-founder of investment firm AN8. M&A is also likely to expand as U.S. and European companies seek to align with companies from South Korea and other East Asian countries.
Overall, both beauty and fashion stand to do well in the coming year. Many luxury investors are familiar with beauty and fashion lines, and they’re willing to use mergers and acquisitions as a way to increase their market share or to incorporate new, exciting approaches to the industry, says Tommaso Nastasi, a partner at Deloitte.
As healthcare costs continue to rise in the U.S. and elsewhere, healthcare companies are likely to turn to M&A in order to control costs while furthering research and remaining competitive.
In a study by PwC, 40 percent of healthcare executives said they expected their company to acquire, partner or collaborate with other healthcare businesses in 2020, say Benjamin Isgur and fellow researchers at PwC.
Public views of healthcare are likely to play a role in these decisions, as well. “As they weigh their options, health companies will need to ensure that the deals they pursue pass the sniff test of employers and consumers seeking more affordable care,” Isgur and the PwC research team write.
Hot Topics Across Industries
Technology continues to play a huge role in merger and acquisition decisions. “Companies need to constantly reassess whether they can sustain their competitiveness,” says Susie Huang, head of M&A for the Americas at Morgan Stanley. “Virtually no industry is immune to the competitive pressures emanating from digital and technology disruption.”
As technological evolutions disrupt every industry, many incumbent companies are looking for ways to improve their technological stance by merging with or acquiring more digitally forward players. One Ernst & Young study found that companies are particularly interested in M&A deals that will expand their rosters of tech talent or allow them to expand their tech capabilities, says Steve Krouskos, global vice chair of transaction advisory services at Ernst & Young.
Middle-market M&A may also continue to do well, says Paul Aversano, managing director at Alvarez & Marsal. “The U.S. economy is fairly healthy; there is a tremendous amount of capital/dry-powder needing to be deployed; and interest rates are still at historically low levels and look like they will stay that way through the remainder of the year,” Aversano says.
These factors point to a promising field for mergers and acquisitions in 2020.
Reasons for Caution: Keeping an Eye on the Economy
Going into 2019, 60 percent of business executives were bracing for an economic downturn, says Russell Thomson, national managing partner of M&A at Deloitte. While this downturn did not materialize in 2019, business leaders are watching the current economy with the understanding that a return to contraction may occur soon.
Global economic factors have led to predictions of a 2020 M&A slowdown from some sectors. For instance, a Baker McKenzie study forecasts that M&A activity will drop 25 percent in the coming year.
“Deals are getting done, but the current slowdown is inevitable considering the continuing uncertainty around trade and regulation,” says Ai Ai Wong, chair of the global transactional group at Baker McKenzie. While available capital is plentiful, many companies are sitting on that money in the face of economic uncertainty rather than putting it into play.
Top concerns in international M&A include concerns about Brexit and about the brewing trade war between the United States and China. In addition, recent U.S. trade decisions like withdrawal from the Trans-Pacific Partnership and renegotiation of NAFTA are “a sea change from what we’ve had in the past in terms of U.S. trade policy,” says Ira Kalish, managing director and chief global economist at Deloitte.
The Role of Politics in M&A Activity
Political uncertainty may have a significant effect on M&A in 2020. A potential economic slowdown would have political effects, as would issues of international politics and trade, increasing regulatory demands, and the uncertainty surrounding the 2020 U.S. Presidential election, say Colin Wittmer and Curt Moldenhauer at PwC.
In 2019, concerns about Brexit rippled through Europe, with a corresponding effect on European M&A deals. In particular, the number of deals involving German companies dropped 10 percent in the first half of 2019, compared to the first half of 2018, says Michael Drill, managing director and CEO of the German branch of Lincoln International.
Yet business indicators show that German companies are simply waiting for a more opportune moment to make deals. And that moment may be coming in 2020. “Based on our current project back-log and our ongoing discussions with larger corporates, private equity players and various business owners, we expect continued, robust M&A activity in Germany over the next 15 months,” Drill says.
Germany provides one clear example of widespread business resilience in the face of M&A uncertainty. “Companies that can leverage the historic amount of capital available and make the right adjustments in the face of these headwinds should be resilient enough to invest in growth in 2020,” say Wittmer and Moldenhauer.
Business may be bouncing back after Brexit, too. Following a Conservative victory in the December 2019 U.K. election, many companies feel they have some clarity about the country’s path forward on Brexit, says Marco Compagnoni, a private equity partner at Weil Gotshal & Manges.
Overall, despite economic and political concerns, businesses retain a healthy dose of confidence in their ability to leverage existing capital effectively.
“There are clearly concerns about trade tensions with China and U.S. political uncertainty — especially with a presidential election next year — but with consumer confidence still relatively high and the U.S. economy looking fundamentally strong, there’s no sense that the sky is falling,” says Stephen Sayre, co-leader of the M&A practice at law firm Dykema Gossett.
2020 may not reach the record-breaking levels of 2018, either in number of deals pursued or the dollar value of deals closed. Companies that keep key uncertainties in mind, however, stand to benefit from pursuing mergers and acquisitions in the coming year.