More than just the numbers

A strong 2017 bodes well for M&A activity in 2018, but deals will depend on more than the numbers

2017 was a strong year for global and UK M&A, paving the way for a robust 2018 as corporates look for opportunities for growth. Digital transformation looks set to remain a core driver of global executives’ appetite to acquire over the next 12 months. The global economic environment should provide some assurances too, as, according to the IMF’s latest World Economic Outlook launched last Monday at Davos, the global economy will grow by 3.9% this year, 0.2% faster than previously expected.

While in 2017 global deal value fell by 7% (US$3.2t) compared to 2016, deal volumes increased 6%. In the UK we saw 2,890 deals worth US$215bn in 2017 compared to 3,530 deals in 2016 worth US£299bn in 2016. Taking a closer look at the UK market, domestic M&A volumes decreased from 2,018 to 1,536, but deal value increased compared to 2016 . Despite initial scepticism, companies managed to overcome the various geopolitical shifts which brought about complexity to the M&A picture. Growth remains the number one priority, and M&A is a route to achieve that bolstered by available and cheap financing, strong balance sheets, record dry powder for buyout funds and a bulging deal pipeline.

Inbound and outbound deals

At the same time, inbound and outbound deals tell a different tale. UK inbound activity decreased in value from US$134bn to US$65bn and deal volumes fell from 892 to 732. Outbound activity, also saw a drop in value to US$63bn from US$111bn, but deal volume remained stable at 622 in 2017 from 620 in the previous year.

Looking ahead, the slowdown in mega deals, which characterised global 2017 activity, will likely continue as regulatory scrutiny on big mergers increases. Although US tax reform could trigger some near-term large deals, the biggest M&A story of 2018 will be the continuing era of portfolio transformation.

Companies will continue to reshape themselves and acquire technology and digital assets that will help define their future. Tech-smart deals will help companies future-proof their operations and address continuously changing business models. We should see a strong continuation of deals in the range of US$1b to US$5b as companies buy and sell to transform their portfolios.

Private equity-driven global M&A

At the same time, the US$340bn value of private equity-driven global M&A in 2017 marked a ten year high and further activity can be expected in 2018, with US$628bn of available cash earmarked for buyouts.

The uptick in European PE activity seen in 2017 should continue as economic confidence in the region strengthens. Ten years after PE reached its peak as a driver for global M&A, it is now poised to lift the deal market again. With record amounts of available cash at investors’ disposal, PE funds are not only posing a competitive threat to corporate deal-makers, but are also joining forces with companies on bigger deals. It shouldn’t come as a surprise if this new trend sparks an uptick in activity for 2018.

However, it is a new approach to deal making that could make the deepest mark in 2018. With a wide variety of stakeholders in today’s business environment, the demand for value creation beyond just the bottom line is rising. 45% of executives said in our recent Capital Confidence Barometer, for example, that they need to communicate a broader narrative that clearly articulates the rationale for deals to engage a wider stakeholder set, including shareholders, regulators, employees and local communities.

The ‘purpose’ of a deal now needs to speak beyond typical synergies and cost savings to address the concept of inclusive growth. Articulating this narrative in a compelling way to ensure all stakeholders are onside will become increasingly key to unlocking future M&A opportunities.