The beginning of the year brings with it a raft of reports from the big investment banks that hope to shed light on the major economic trends for the year ahead. This year, the banks are predicting a very strong year for big-value mergers and acquisitions, driven by a number of factors. The largest of these deals are likely to take place internationally and be worth billions of dollars, however, a healthy market for major M&A deals also tends to translate to a healthy market for small and medium-sized acquisitions.
Deloitte’s most recent M&A trends report, looks at the results of its survey of some 1,000 executives. A convincing 68 per cent of those executives predicted an increase in the flow of deals over the coming year. Also worth noting was the fact that 63 per cent said they expect the size of the deals will also grow, while 34 per cent expect deal values to remain the same as 2017 levels.
Importantly, the health of the global economy is a factor in these results, with more of the firms questioned indicating that their reserves of cash have increased and that M&A is the top intended use for those reserves. JP Morgan’s 2018 Global M&A Outlook report agreed with Deloitte, stating: ‘We expect solid GDP growth in all major economies and healthy equity and debt markets to continue to provide companies with confidence to pursue innovative and transformative M&A transactions.’
Alongside the big-ticket deals, there are indications that other drivers of the expected influx of deals could also lead to a rise in mid-market and small business M&A deals.
The ongoing challenges that technology presents to businesses of all sizes continues to be one of the main drivers of mergers and acquisitions activity. Firms of all kinds find themselves racing to keep up with technological advances and buying up tech firms or businesses that offer technological solutions, expertise or tools can help them to continue to operate in the modern marketplace. Ernst & Young Global Vice Chair of Transactionary Advisory Services, Steve Krouskos, explains: “...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 them define their future.
“Tech-smart deals will help companies future-proof their operations and address continually changing business models.”
Technology-driven changes are seen as a disruptor to industries and business owners are buying up firms that help them to meet new challenges and adapt to new business environments. Targets include everything from tech start-ups, to established rivals with particularly expertise that allow them to compete effectively.
Modest organic growth outlook
The reports coming out of the investment banks also agree that there is a general lack of organic growth opportunities on the horizon for businesses of all sizes, further driving the appetite for M&A. Deloitte found that, after technology acquisition, the next largest deal driver, (cited by 19 per cent of respondents) was ‘expanding customer base in existing markets’. The desire to achieve this goal is commonplace among smaller business owners as well as within major corporations and buying up businesses is still one of the most effective ways to achieve this.
The trend for industry convergence is set to continue over the coming twelve months - further driving M&A - and there are certain industries where convergence looks particularly likely. Of course this has been happening for several years - a general example is that of supermarkets moving into retail banking; a specific example is Google buying Nest then teaming up with nPower to launch a smart thermostat. But the phenomenon is gaining momentum.
Construction and energy companies are expected to increasingly converge through M&A, as well as life sciences and healthcare. Financial services in all its forms is also well set up for convergence, while technology firms are also in a prime position to converge with firms in other industries through M&A deals as discussed above.
Could the environment be perfect for smaller M&A deals?
Looking to the trends predicted for major corporations in the year to come can be useful for medium and small business owners who are looking to make acquisitions. Many of the positive factors impacting the market for large-scale M&A have an impact on smaller deals. However, smaller dealmakers aren’t as burdened by market volatility and the impact of growing regulatory powers, including antitrust legislation, suggesting that 2018 could also be a bumper year for M&A activity among SMEs.
So, while it’s full speed ahead for corporate M&A activity this year, business owners operating in the mid-market or SME environment should also prepare for perfect conditions to embark on their own acquisition journeys.
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