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Return of Private Equity Keeps Global M&A Activity On Track

July 28, 2017, 07:50 AM
Filed Under: Mergers & Acquisitions

Data from the first six months of the 2017 show a strong deal appetite despite a highly complex and challenging M&A market and increasing intervention in deals by governments and regulators, according to a new report from EY.

Analysts attribute the robust environment to an influx of private equity capital, which has hit record levels. 

Global deal value totaled $1.4 trillion in H1 2017, a modest decline of 4% against the same period last year. This decline in value can be attributed to a fall in megadeals above $10 billion. Deals valued between $1 billion and $10 billion — the driving force behind M&A globally — remain on par with the same period in 2016. In terms of volume, the first half of 2017 experienced an uptick of 4%, with 18,363 deals compared to 17,642 deals recorded in the first half of 2016.  Analysts attribute the robust atmosphere to private equity (PE) investors returning to the deal table, now with record funds at their disposal.

Even so, several significant acquisitions were curtailed in 2017 due to pressures from various stakeholders, including activist investors and government authorities. The number of executives that walked away from deals as a result of concerns about regulatory or antitrust issues has almost tripled since 2016 according to the April 2017 edition of EY Global Capital Confidence Barometer.

“Geopolitical shifts and rising nationalism has brought additional M&A complexity, but companies are overcoming those barriers," said Steve Krouskos, EY Global Vice Chair — Transaction Advisory Services. "Growth remains the number one priority, and M&A is a route to achieve that. However, given the changing environment, dealmakers may need a broader narrative around purpose and the concept of inclusive growth to keep all stakeholders onside.”

The return of private equity

Ten years after PE reached its peak as a driver for M&A, it is now poised to lift the deal market again. With record amounts of available cash (more than $500 billion) at investors’ disposal, PE funds acquired $124 billion of assets in the first six months of 2017 — up 14% year-on-year. 

PE firms currently have $570 billion in capital allocated to buyout funds, far surpassing the $478 billion recorded in 2007–2008. PE buyouts amounted to just over a quarter of that recorded in 2007. H1 2017 data indicates that percentage will increase this year despite heightened dealmaking complexity.

“Private equity has been relatively quiet during the current deal-cycle. Given its dry powder power and a renewed focus on acquiring growth, we are now starting to see it re-emerge as a major player at the deal table. That bodes well for a strong M&A finish to 2017.”

Recent acquisitions indicate technology and digital transformation are fueling far more deals than are being stifled by geopolitical change.

“Tech and digital are set to remain the leading drivers of M&A for some time," Krouskos said. "Changing consumer preferences and disruption of existing business models mean that executives are continually reassessing and reinventing their portfolios to future-proof the business.”

The recent high-profile $13.7 billion Amazon acquisition of Whole Foods is a clear example of M&A-led sector convergence and digital capabilities that are expected to be used by a business in one sector to disrupt another.

Deal activity in the first half of the year also shows a surge in businesses leveraging M&A and alliances in order to capture a potential boom in autonomous cars. Companies in both the technology and automotive sectors are buying and bonding through alliances to capitalize on the rewards on offer in urban mobility.

Overall, EY analysts say the dealmaking outlook remains robust for 2017. Available and cheap financing, strong balance sheets, record PE for buyout funds and a bulging deal pipeline all point to deals featuring prominently in the business growth equation for the foreseeable future.

“Future M&A is expected to remain buoyant as dealmakers continue to pursue growth opportunities and technological advantage amid disruption," Krouskos said. "Deal markets have been stronger in the second half of the year in 14 of the past 20 years and in every year since 2012. Notwithstanding any major systemic shocks, we can expect M&A to continue at a healthy pace in 2017.”

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