Buoyed by tax reform, a more relaxed U.S. regulatory climate and growing cash reserves, U.S. dealmaker optimism is at a three-year high. Most are anticipating more and bigger merger and acquisition (M&A) deals in 2019, according to Deloitte’s “The State of the Deal: M&A Trends 2019” survey of 1,000 U.S. corporate dealmakers and private equity firms.

About 79 percent of all respondents say their organizations will close more deals in the next 12 months and 70 percent expect the size of transactions to be larger than those closed in the preceding year. 

“Our respondents seem to predict another active M&A year ahead,” said Russell Thomson, managing partner of Deloitte’s U.S. merger and acquisitions services practice. “But, deal making may look a bit different in 2019 with a heavier emphasis on more traditional customer base expansion and diversification of products and services, rather than technology plays.  According to our survey, an increasing number of organizations also appear to be looking to accelerate deal making to take advantage of current domestic policy.”

Domestic policy could accelerate some deal making

More than half (53 percent) of all respondents say that tax reform provides them with additional capital to facilitate transactions. Nearly as many (44 percent) report that a more relaxed regulatory environment will drive more deal activity in the year ahead. 

Respondents were more split on the impact rising interest rates could have in 2019:  41 percent say higher rates will slow activity or reduce their ability to execute deals; however, 45 percent say rising rates will accelerate deal activity.

Just 35 percent of all respondents say that global trade uncertainty is reducing interest in deal-making. But, private equity respondents say ongoing tariff negotiations negatively impact their portfolio companies’ operations (58 percent) and cash flows (55 percent).

Deal-making challenges remain amidst optimism

Despite the strong deal environment, 40 percent of all respondents say that up to half of their deals in the past two years failed to generate expected value or return on investment. Economic forces continue to be the top reason deals fail to generate expected value for both corporate and private equity respondents (38 percent).

Corporate respondents cite additional reasons deals fail to generate value, including: sales did not materialize as expected (33 percent); deal execution or integration gaps existed (32 percent this year, up from 27 percent last year); lack of a well-defined deal strategy (24 percent this year, up from 18 percent last year); and inadequately performed due diligence (23 percent this year, up from 19 percent last year).

Among private equity respondents, the impact of regulatory forces on deal failures jumped to 35 percent from 26 percent a year earlier. Further, there’s a surge in private equity respondents who say underperforming deals fail to achieve revenue synergies (29 percent, up from 19 percent a year ago), as well as a jump in deals that fail to align culturally (19 percent, up from 14 percent in a year).

Thomson added, “The tenets of effective deal making have not changed. Executives consistently tell us that having a well-defined strategy and approach — spanning the full lifecycle of the deal inclusive of execution, due diligence and post-merger integration — has been key in helping their organizations’ deals realize value.”  

Appetite for divestitures hits three-year high, IPO expectations rise

Appetite for divestitures continues to rise this year, with 81 percent of all respondents (up from 70 percent in 2018) expecting to pursue divestitures in 2019 — another three-year high. Corporate respondents were evenly distributed on reasons for divesting businesses as financing needs (16 percent), a change in strategy (16 percent) and the desire to shed technology that no longer fits their business model (16 percent) were ranked equally. Amid prolonged strong corporate earnings growth in recent years, only 4 percent plan divestitures due to low profitability.

Divestitures are central to the private equity business model, so 51 percent of private equity respondents expect strategic sales to be the primary form of portfolio exits in the year ahead, while 27 percent anticipate initial public offerings (IPOs) for their portfolio company exits, up from 19 percent a year ago.

Corporate cash reserves continue to grow as deployment strategies shift

Many corporate respondents (69 percent) say their cash reserves have grown over the past two years and only 5 percent report a decline. Thirty-five percent plan to use excess cash for M&A (down from 40 percent last year) and 23 percent plan to invest in organic growth (dropping from 33 percent last year). Interestingly, 13 percent intend to pay down debt, a new response option in this year’s survey.

Tech acquisition no longer the top strategic driver for corporates

Survey findings show a slight decline (15 percent this year, down from 20 percent last year) among corporate respondents who say acquiring technology is the most important aspect of their company’s M&A strategy. Instead, corporate respondents are most focused on deals to expand their customer bases in existing geographic markets (20 percent) or to expand and diversify their products and services (19 percent). Talent acquisition will drive M&A strategy for 12 percent of corporate respondents in the year ahead, potentially reflecting an increasingly tight labor market amid record low unemployment.

Thomson added, “In previous years, corporations have been somewhat more focused on acquiring underlying technology, but as valuations in the tech sector have continued to rise, these deals become harder to do. More corporations are also pivoting to take advantage of a strong economic environment to monetize less strategically significant tech assets.”

Industry convergence to continue, but shift

In this year’s survey, more than twice as many corporate and private equity investor respondents as last year (19 percent this year, up from 8 percent last year) selected banking and securities as the most likely sector to converge with other sectors, followed by energy and resources, asset management and technology. In a shift from recent years, fewer respondents anticipate companies in the technology industry will be involved in transactions with those in other industries in 2019.

 China returns to cross-border M&A priority market list

Most respondents (93 percent) expect some of their organizations’ acquisitions to be made in foreign markets in 2019 and one-third expect half of their M&A deals to involve acquiring targets operating principally in foreign markets.

Canada (42 percent) again tops the list of foreign targets for all respondents for the third consecutive year. And, amid growing trade tensions, China jumped to second place (28 percent, up from 18 percent last year), tying with Europe excluding the United Kingdom (28 percent). In the year ahead, respondents are less interested in pursuing deals in the U.K. (24 percent, down from 29 percent last year). The popularity of most of the top foreign markets for deal making hit a three-year high, except for the U.K.’s slight slip in that ranking.

About the survey

Deloitte’s “The State of the Deal: M&A Trends 2019” report is now in its sixth edition. The survey was fielded online from Sept. 4-14, 2018 by market research firm OnResearch. It polled 1,000 executives involved in M&A at U.S. corporations (75 percent) and private equity firms (25 percent). Respondents work both in the C-suite (53 percent) and in non-C-suite leadership positions (47 percent). Corporate respondents’ organizations were public (46 percent) or privately held (54 percent). Earlier iterations of the survey were re