There is plenty to be positive about in the US M&A market. Deal values have reached an all-time high, and appetite for deals is strong. The economy is buoyant, balance sheets are robust and both companies and private equity firms have cash to put to work, which should sustain activity in 2016.
There are reasons to exercise caution, however. Pricing has reached heights not seen since the last credit boom, and megadeals concentrated in a small number of industries are dominating the market. In volume terms, activity was down year-on-year. Not only that, volatility in capital markets is having a knock-on effect on M&A.
With 2015 behind us, dealmakers should be aware of the potential risks and trends that lie ahead:
It will pay to be prudent: The market has scarcely been more competitive, and purchase multiples continued to rise throughout the year. This may cool off in 2016, as the effect of the interest rate rise comes to bear and debt financing becomes marginally more expensive. Ultimately, buyers will have to ensure that their investment theses are rock-solid and would do well to avoid highly contested auctions where possible.
Beware of debt tremors: Investors are becoming more risk-averse in the face of overheating credit markets and the interest rate being lifted. So far, it has only been the lowest-rated debt that companies are finding more difficult to sell. This will likely punish private equity firms looking to the junk bond market to finance deals with highly leveraged structures. Debt is likely to be harder to access and will come at a higher price than it has in the last two years.
The impact of a strengthening dollar: Economic growth may be relatively robust, but with that has come a strengthening dollar. This will make export-dependent businesses less competitive and may result in greater pressure to pursue deals to offset depressed revenues at a time when pricing has never been higher. Couple that with a slowdown in emerging market growth, particularly in commodity-rich countries, and US businesses may find themselves exposed to weaker demand.
Beware the impact of the election: The election results could affect companies’ enthusiasm for M&A. Indeed, the closer the United States gets to the presidential vote in November, the more likely it is that dealmakers are going to hesitate to transact until there is more visibility on the results and what they are going to mean for the United States. This means that we could see a dip in the third and fourth quarters as companies try to get deals across the line before the election.
Activists are more vocal and more influential: As demonstrated by the likes of diversified industrials DuPont and Dow and Internet giants Yahoo, the activist investors continue to be a significant influence on the M&A market. According to ratings firm Moody’s, incidents of shareholder activism in the United States have risen year-on-year since 2009. Awareness is not enough; dealmakers need to engage with shareholders before “things get ugly”.
Use tech to seal the deal: Technology has made it easier to collect, digest, analyze and share information. By expediting and simplifying these processes, technology allows parties to focus on the deal itself, rather than the mechanics of getting it done. Technology facilitates the sourcing of transactions by identifying potential buyers and sellers through online sourcing networks. It also enables the simultaneous dissemination of information to multiple parties across multiple jurisdictions through virtual data rooms and other cloud-based platforms, thus allowing auctions to be opened up to larger pools of potential bidders. Ambitious buyers need to come to grips with the disruption in dealmaking or they risk getting left far behind.
Activist investors continue to be a significant influence on the M&A market. According to Moody’s, incidents of shareholder activism in the US have risen year-on-year since 2009. Awareness is not enough; dealmakers need to engage with activists.
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