M&A in 2017: challenges in getting the deal done
April 2017 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Mergers & acquisitions (M&A) are often susceptible to an uncertain landscape. With 2017 likely to see continuing economic and geopolitical upheaval across the globe, companies are well-advised to adopt a more cautious approach to dealmaking.
Uncertainty is couched in transformative events such as the election of Donald Trump and the knockon effect this will have for regulatory and tax environments, as well as the UK’s decision to leave the European Union (EU). These and other developments could result in a major uptick in the challenges dealmakers face when identifying a target and structuring a transaction.
David Jorgenson, chief executive of Equiteq, believes that the biggest challenge to M&A in the near term is the potential uncertainty around the political landscape. Specifically, regulatory or tax changes may cause buyers or sellers to hit the pause button on their M&A activities as they wait to see how the global situation develops. “This is common in a strong economic environment where the fundamentals might support deal activity but a feeling that change is just around the corner – perhaps an economic slowdown, tax law changes and regulatory restrictions – will reduce the appetite to finalise a deal,” he says.
In the view of Katharine Dennys, research editor EMEA at Mergermarket, the election of Donald Trump and the result of the EU referendum signal a shift toward governments looking internally to preserve their economies. Furthermore, the upcoming French and German elections, in April and September 2017, respectively, may also see a continuation of this trend. Should this come to pass, the consequential rise in protectionist policies may well affect cross-border dealmaking, as countries increasingly scrutinise large inbound deals which have the potential to dominate certain markets.
Ms Dennys also points to the U-turn by the Chinese government regarding its policy on outbound acquisitions, following the record value and number of deals which took place during the first half of 2016. “A change in legislation whereby the Chinese government will scrutinise overseas transactions valued at more than $2bn was imposed to reduce a growing capital flight. As a consequence, it is likely that China’s outbound acquisition spree will become more muted in 2017,” she notes.
Given the extent of the challenges, how should we then characterise the outlook for M&A this year? “The UK’s decision to leave the EU caused uncertainty among shareholders and board members alike,” says Ms Dennys. “This, coupled with a lack of transparency surrounding the terms of the UK’s exit, became a major obstacle to making deals. Some light has since been shed on the precise exit terms, including the UK’s removal from the single market and the recent parliamentary vote for triggering Article 50, which is expected to increase confidence among dealmakers looking to secure deals.” With UK domestic M&A showing renewed signs of life in early 2017, following the acquisition of Booker Group by Tesco for $4.5bn and Shell selling more than half of its North Sea assets to Chrysaor for $3bn, the uptick is likely to continue as the UK becomes increasingly isolated from European markets and turns its attention to securing growth at home.
Turning to the effect that Donald Trump’s presidency is likely to have on US M&A, despite promises made during his election campaign to block anti-competitive deals, such as the $105bn AT&T/Time Warner deal, his attitude as president suggests a rather more lenient approach. “Trump’s pro-business stance is widely seen as a turn away from former president Obama’s tough policies on mega-mergers, which resulted in the collapse of the $183.7bn Allergan/Pfizer deal in April 2016,” explains Ms Dennys.
Dealmaking in 2017
“From our global perspective, 2017 is shaping up to be a strong year for M&A activity,” says Mr Jorgenson. “We see the strong economic performance in the US as a particularly important driver of that activity. At this point, we are not seeing any broad impact, either positive or negative, from specific geopolitical events. Events like Brexit can affect specific deals or sectors, but the more important drivers are broad economic performance and long term trends in how companies consume consulting and other specialist services – all of which are driving increased deal activity.”
Despite the significant political headwinds facing dealmakers, conditions remain favourable, with high liquidity, access to cheap financing, healthy balance sheets and a need to demonstrate growth to shareholders via M&A all providing a positive outlook for 2017. “Technology will drive M&A activity, with disruptive industries such as artificial intelligence (AI), FinTech and the Internet of Things (IoT) continuing to attract investor attention,” says Ms Dennys. “However, it is too early to tell whether we will reach the peak in M&A activity seen during 2015 or even 2016, as dealmakers assess the ongoing shifts in policy and regulation affecting transactions and wait for markets to rebalance.”
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