By Jolette Persson, Hottinger Capital Partners
Going into 2020, industry leading dealmakers seem to disagree on the Mergers & Acquisitions outlook for this new year.
Some active participants paint a rosy picture, despite global geopolitical and trade-related uncertainty ahead. A common theme amongst practitioners is the belief that M&A transactions continue to be the most efficient way for companies to transform, particularly with regards to ongoing tech disruptions. Given the accelerating pace of technological change, there is a clear trend towards acquiring ready-made, tech-enabled solutions developed elsewhere rather than attempting to develop these internally, as falling behind the curve is a real threat and a rising one at that. Additionally, shareholder activism continues to prevail in M&A transactions as demand for breakups and corporate clarity remains at an all-time high[i].
More bearish dealmakers make a case for a repeat of last year’s modest increase in M&A activity, primarily driven by a balance between a dovish growth picture and the economic uncertainty of a possible recession. Global cross-border transaction volume in 2019 was down (-13% [ii]) compared to 2018, likely reflective of continued protectionist policymaking taking stronger precedence in dominant markets, particularly in the U.S and China. In Europe, factors impacting deal-making during the year included Brexit, a global slowdown in trade and concerningly low PMI readings in Germany. On top of these factors, several European governments strengthened their regulatory regime in 2019 (as did the US, after multiple waves of intense industry consolidation) which further pushed down appetite not only for M&A transactions but also for wider European equity markets, as European companies either cancelled or put their IPO plans on hold.
As UK-based investors, the question remains whether the Eurozone will regain its competitiveness as a turnaround market relative to that of the US and Asia, particularly as the UK has historically served as a gateway in European expansion strategies. Certainly, from a valuation point of view, UK-based assets continue to trade on wide discounts to global equities, both public and private. With Boris Johnson winning the general election and “sufficient” progress being made in Brexit talks, it is expected that M&A activity will pick up in the region in 2020. This is further supported by easy financing conditions. Early indications of a rebound became evident during the month of December 2019, with a clear spike in acquisitions of UK assets, predominantly in IT, where total deal value was £625m [iii].
Elsewhere in the UK market, 2019 saw the highest deal volume since 2007 in take-private transactions by private equity buyers; a focus that is likely to continue in 2020. Given the record high level of dry powder in private markets (+£1.45tn of private equity capital alone [iv]), the wider industry consensus envisions private equity investors being very active in both public and private market opportunities in 2020. Private equity fundraising in Europe, although not as strong as in North America, remained robust throughout 2019, supported by a continued benign interest rate environment.
Going forward, cross-border dealmaking in the UK and wider Europe is expected to be driven by flows between Europe and Asia rather than the usual Europe-North American route. European companies and Asian investors rightfully remain nervous around further regulatory challenges pending in the US. The expanded CFIUS jurisdiction* due to be implemented in 2020 represents a significant risk for acquisition targets involved in advanced technologies, infrastructure or consumer data. Simultaneously, European companies deprived of growth cannot ignore the far more favourable growth prospects and demographics prevailing in Asia going into 2020.
*“CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States (“covered transactions”), in order to determine the effect of such transactions on the national security of the United States.”[i] JPMorgan, 2020 Global M&A Outlook Annual Report [ii] Dealogic data as of 12/31/19 [iii] GlobalData’s deals database [iv] CNBC, Private equity’s record $1.5 trillion cash pile comes with a new set of challenges 03/01/20