State of the M&A Deal in 2019– August 07, 2019

Posted by Alex D’Angelo

The time period between 2014 and 2018 signaled the most active five-year span for M&A activity in U.S. history. This boom has extended the decade-long rally following the lows of 2009 where M&A transactions and deal value in the U.S. were at roughly half of their current rates. Given the continual rise of U.S. deal volume in recent history, companies of all sizes, sectors and growth plans must have a firm grasp on the M&A process, current market data and projected activity throughout the rest of the year to understand potential impacts to the business.

U.S. M&A Activity in the First Half of 2019

Based on data from the Institute for Mergers, Acquisitions and Alliances (IMAA), the first half of 2019 (through July 10) has seen 6,279 U.S. transactions announced, with a total dollar value of $1.09 trillion. Mega deals (transactions valued at more than $10 billion) continue to drive the total dollar value of M&A in the U.S. In 2018 the top five transactions were responsible for over 10% of total M&A value for the year. According to Dealogic, mega deals have accounted for $729.6 billion of all U.S.-targeted volume in the first half of 2019.


The above shows a listing of some of the largest U.S. M&A deals in the first half of 2019 per various reports. Reflected dollar values are a mix of purchase price offerings and also new business values in the case of Mergers of Equals (e.g. SunTrust-BB&T). Information compiled from multiple sources by Cohen & Company.
 
Per Forbes, equity markets are still strong. Private equity has played a meaningful part in recent deal activity, with more than $600 billion of capital being invested into buyout funds over the past three years. Aside from private equity, certain industries are also adopting a “buy-and-build” model, in which companies acquire targets that lay a foundation for new business areas within their organizations. The pharmaceutical industry, for example, has seen major drug makers acquire smaller shops to expand their capabilities. An example of this is Indianapolis powerhouse Eli Lilly acquiring Loxo Oncology for $8 billion to move into the precision medicine space.  

Projected U.S. Activity in the Second Half of 2019

A year’s deal volume tends to be more predictable than overall deal value. This is due to the fact that a single mega deal can skew M&A value for any given timeframe. That said, if U.S. M&A activity were to continue at the previously stated IMAA rates in the first half of 2019 throughout the second half of 2019, we would expect to see nearly 12,000 announced transactions for the full year valuing roughly $2.08 trillion. This would put 2019 total transaction volume at its lowest level since 2013 and would mark the second straight year of decreased volume after eight previous years of increases. However, the past 30 years have seen high deal volume in October and December, so major spikes of activity in those regularly active months could drive volume upwards.
 

Historical comparisons show an overall rise in deal volume from 2009 – 2017 with shifting overall deal value. Projecting the second half of 2019 based on the first half of the year could see a sizable decrease in deal volume with a marginal increase in overall deal value. Chart adapted from Institute for Mergers, Acquisitions and Alliances (IMAA).
 
Despite this predicted decrease in deal volume, deal value is projected to increase for the second straight year based on IMAA data. Two pending mega deals from the above list could be the main drivers of this increased deal value total in 2019:

  • Industrial conglomerate United Technologies Corp. recently announced the proposed purchase of defense contractor Raytheon for $121 billion

  • Global biopharmaceutical company Bristol-Myers Squibb proposed a $74 billion purchase of the biotech company Celgene

Given recent history’s annual M&A value dependency on large-dollar deals, should these proposed mergers not go through in 2019, we could be looking at a potential down year for both annual deal volume and deal value for the first time since 2009.  

Potential Drivers for Less 2019 U.S. M&A Activity

Looking ahead and pulling in trends from the macroeconomic environment, there could be several reasons for a potential decline in M&A activity throughout the second half of 2019.

  1. Enhanced scrutiny of big technology companies. With one of the major drivers of past and present deals being the acquisition of new and improved technology, the enhanced scrutiny on tech companies of late could be a deterrent for acquirers looking to improve their existing capabilities. Between the previous investigation of Amazon, Apple, Facebook and Google regarding misuse of market power split between the Federal Trade Commission (FTC) and the Justice Department; the FTC’s probe into, and resulting $5 billion settlement with, Facebook surrounding consumer privacy; and the Justice Department’s recently announced review into large internet companies’ accumulation of market power, one of the major drivers of M&A deals is facing a heightened public microscope that could lead to some hesitation towards buying technology companies.

  2. National opposition to major deals. Federal and state governments are showing increasing sensitivity to M&A activity in the attempts to ensure fair market competition. This mindset has been clearly displayed throughout the ongoing saga that is the T-Mobile and Sprint merger. While federal officials have laid out terms to make the deal safer in their eyes, an attorneys general lawsuit from 14 U.S. states shows a clear national opposition to major deals such as this. Another example is delays in the aforementioned BMS-Celgene deal due to FTC reviews and revisions. While both deals still may go through, companies may not want to undergo the ongoing effort and scrutiny to get deals done in today’s market.

  3. The unicorn business model and IPO. While IPOs were a hot topic in the first half of 2019, many of the most publicized trading openings were for “unicorn” companies — startups with a valuation over $1 billion — like Lyft and Uber. While some of these unicorns have succeeded in building value after IPOs (e.g. Zoom Video, Pinterest, Beyond Meat), scenarios like Lyft and Uber’s saw major devaluations and relatively unsuccessful IPOs. Uber has since recouped much of those losses and surpassed their original IPO list price but is still significantly lower than original estimates. This has been diagnosed in part to be a result of lacking faith/tangibility in the companies’ earnings, as many of today’s most sought-after startups operate at a loss due to pushed reinvestment in new areas, only offering future profitability forecasts based on continued growth. Between a hit-or-miss success model when these unicorns go public, the building prevalence of the “operate-at-a-loss” business model, and growing fears of a recession and/or economic downturn, acquirers may shy away from sweeping up unsure wins and having to wait years for the payout.

Organizational Effects: What Does This All Mean for Businesses?

As a whole, the M&A market’s previously feverish pace looks to be slowly fading. The past five years have seen an acquisition environment consisting of a multitude of acquiring companies aggressively competing for targets. Bidding was at an all-time high with previously unheard-of amounts of debt and risk being readily absorbed. With deal activity slowing, that soon may not be the case. Shifts like this typically signal less completive bidding and lower baseline prices. Understanding this shift is vital for companies to either not overpay for a potential acquisition and/or know their expected value as a potential target. Incorrectly valued acquisitions can set companies back years on both sides of the deal, and the proper valuation for a company today is not always the right valuation for a company tomorrow.
 
Understanding the “state of the deal” is just as important for companies steadfast on organic growth as it is for growing conglomerates. There are pros and cons of buy vs. build strategies, and at some point, every company will be in a position where an acquirer and/or target company appears. To make accurate assessments on the viability and success of possible mergers, one needs to understand the current market baseline. That understanding, coupled with an established M&A strategy and a unified management team is essential to ensuring the realization of synergistic results.
 
In short, knowing how to effectively add value to your company when an M&A deal presents itself is challenging, yet vital. Without identifying key details before deals go through, there are countless unexpected challenges that will arise.
 
>> Read “How your M&A deal can be the perfect catalyst to create a better operating model.”
 
The lucrative nature of M&A is shown by its more than $2 trillion value in the U.S. alone and $3.9 trillion globally. Proper preparations are required to retain stability, overcome integration and divestiture challenges, and achieve full realization of a new company’s potential.
 
Please contact a member of your service team, or contact Jim Boland at jboland@cohenconsulting.com or Alex D’Angelo at adangelo@cohenconsulting.com for further discussion.
 
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.