Why Aren’t M&As Booming in 2017?Author: Kathryn Gaw
The first quarter always brings with it a slew of analyses and think pieces on every possible financial trend for the year ahead. And this year is all about much-anticipated M&A boom. Except that it isn’t actually happening – at least not yet.
Two of the most anticipated deals of the year – the Heinz/Unilever merger and the London Stock Exchange/Deutshe Boerse merger – have already fallen by the wayside. A proposed £11 billion ($13.43 billion) deal between fund managers Aberdeen Asset Management and Standard Life has already been plagued by high-profile staff exits and stock volatility, just a week after the deal was announced.
However, this hasn’t stopped pundits from speculating that 2017 could be the best year yet for M&A deal flows. As a virtual data room provider, iDeals has been carefully following all the news related to M&A activity. For instance, it has been pointed out to the rise in early-stage M&A activity in the last quarter of 2016, as evidence that a 2017 boom is imminent. However, earlier this month it has been shown that early-stage M&A activity in North America decreased by five percent.
So what could have changed between Q42016 and now, to change the M&A outlook so significantly?
The obvious answer ‘Donald Trump’. The new U.S. president is still an “unknown” entity for the M&A sector, according to Moody’s analysts. While construction companies have seen a stock bounce in the wake of the border wall announcement, the ongoing Obamacare negotiations and migration issues make it difficult to predict where consolidation may take place. Dealmakers don’t like to work with unknowns, especially when there is already such a high failure rate in the M&A sector, so it is safe to assume that most of the year’s deals will take place only after Trump’s policies have been fully clarified.
However, the evidence of slowing M&A growth dates back much earlier than the U.S. election. According to Intralinks, early stage M&A activity in North America fell by 9.4 per cent in the first quarter of 2016, and by 11.2 per cent in the second quarter . This suggests that M&A activity is in steady decline, with the first few months of 2017 doing nothing to dispel worries of a deal rout.
One reason for this could be the ongoing low interest rate environment, which has made it cheaper for companies to borrow money to fund growth, rather than consider M&A options.
It’s not all bad news, however. For the second year in a row, global technology M&A deals reached an all-time high in 2016, and the early signs show that 2017 will be another good year for the sector. Already this year, we have seen the ongoing $4.5 billion acquisition of U.S. based software company Mentor Graphics by tech giant Siemens , and Intel’s $15.3 billion Mobileye deal.
According to a recent data room report , these multi-billion-dollar tech deals are a sign of things to come, as technology-driven M&A sees lower deal volumes but higher values. The report found that overall deal volumes in technology M&A fell by five per cent year on year in 2016, but aggregate deal value is estimated $466.6 billion.
“The second-half slowdown in global technology M&A deal volume suggests tech companies are approaching a dealmaking plateau,” wrote Jeff Liu, EY technology industry leader, in the report. “But with digital technology disruption still in its infancy and the extraordinary growth of IoT-related deals, it’s likely to be a very high-altitude plateau, indeed.”
The mining sector is also expected to see a small increase in deal activity in the near future, as the commodity price slump encourages consolidation in the industry.
However, this is all speculation, not unlike last year’s claims that 2016 would be a stellar year for M&A . The success rate of M&A deals is still just 50 per cent, and some studies have placed the failure rate as high as 90 per cent . For every Standard Life/Aberdeen Asset Management announcement, there is a Deutsche Boerse/LSE and a Unilever/Kraft Heinz failure looming in the background. Despite early optimism around the tech and mining sectors, it’s impossible to say whether or not 2017 will see an M&A boom, or whether macro-economic caution and low interest rates will keep dealmaking at a lull.