M&A Trends to Monitor in 2018

Policy uncertainty and rising markets are rarely the ideal conditions for mergers and acquisitions, particularly following three years of M&A growth. Yet 2017 was a near-record year, and 2018  might be even busier. Companies increasingly feel that it’s riskier to wait for tax reform and deal with uncertainty than it is to move ahead with mergers. Here are five trends we’re seeing in the market that could influence things for the next year or longer.

Convergence

Non-tech companies are buying tech firms, and tech firms are investing in non-tech businesses. This will continue, because all companies must be increasingly tech-driven. Convergence runs both ways. The increase in ecommerce and the change in consumer behavior are opening new options for online revenue.

Lots of Cash and Tax Reform

Tech and pharmaceutical companies have the most cash to invest, but it’s difficult to determine how much of that cash they will actually use. We may see some companies begin returning capital to shareholders, increase dividend payout ratios, and deploy capital to marketing, research and M&A.

Analysts initially believed that tax reform would hurt private equity but the fallout so far isn’t what was feared. It’s pricier now to finance purchases, but not enough to deter deal-making. In 2017, private equity contributed to 22% of M&A volume.

An Activist Climate

Surplus cash could be a red flag for activist shareholders. The end result is often M&A that gives activists board seats and share-price gains. Activist U.S. funds are now looking at targets in Asia and Europe. Though they remain active here, there’s a lot of capital available and fewer options in the U.S. With growing competition, more institutional investors are adopting hedge fund tactics.

A Dose of M&A in Healthcare

Nearly $39 billion in M&A healthcare deals were announced in January 2018, making it the strongest start in a decade. This pace will likely continue. Though valuations remain high, access to affordable cash, pricing pressures for services and products, and an increasing competitive marketplace are driving deals. M&A is especially prevalent in pharmaceuticals, where companies are attempting to lessen near-term revenue gaps due to patent losses on key drugs.

In healthcare services, new entrants with a focus on technology, as well as mergers between incumbents and their competitors, are likely to continue to drive more activity.

Inter-regional Activity

Cross-border M&A deals accounted for a third of 2017’s total deal volume. There’s no sign that this will change. In the Asia-Pacific region, companies are interested in American and European acquisitions, but regulatory headwinds may dampen that enthusiasm. Some analysts forecast that US and non-US earnings will peak in the second half of the year. This has the potential to trigger three or more Fed rate hikes.