Dealmakers are braving uncertainty and geopolitical storms
Respondents overwhelmingly agree that M&A will pick up in the year ahead and 71% say they will expand their cross-border investments as they explore foreign markets for growth opportunities.
- 54% of respondents predict an uptick in M&A in the year ahead
- 71% say they will ramp up cross-border M&A despite geopolitical turbulence shaking the globe
- Southeast Asia and North America are among the top investment destinations, although large numbers of respondents will remain focused on their home markets
- M&A will be driven by a need to respond to the US-China trade war, according to 77% of respondents
While geopolitical events and economic uncertainty create concerns globally, dealmakers remain positive on their ability to get deals done and many anticipate an uptick to the ongoing rush of M&A transactions. In a survey of 150 global dealmakers, 54% say M&A activity will increase through the rest of 2019 and beyond. A further 71% say they will focus on cross-border investments, mainly as they seek out new markets and centers for their operations in response the US-China trade war and growing protectionism globally.
These were among several key findings in research conducted by Baker Tilly International and M&A intelligence provider Mergermarket, released today in the report Global dealmakers: Cross-border M&A outlook 2019.
The report explores current trends and challenges shaping the global market for M&A. It also explores opportunity areas – key growth markets and hot sectors – where dealmakers are likely to find value in the year ahead.
“We are seeing strong interest among buyers despite the geopolitical turbulence in almost every corner of the globe, and respondents believe this will continue into the year ahead,” says Michael Sonego, Baker Tilly Global Corporate Finance Lead.
“We particularly see strong forecasts for an increase in cross-border investments which are more complex, but also potentially offer safeguards for businesses at a time of disruption.”
“We particularly see strong forecasts for an increase in cross-border investments which are more complex, but also potentially offer safeguards for businesses at a time of disruption.” – Michael Sonego
Respondents highlight Southeast Asia and North America as key growth markets and geographies where they will focus investments in the year ahead. The high ranking of Southeast Asia and North America reflects the options now facing multi-national businesses and private buyers pursuing new growth opportunities abroad. On the one hand, the developing economies of Asia, with their expanding middle-class populations and rapid rates of growth, offer exciting potential. Meanwhile, North America – notably the biggest economy in the world – has posted strong growth over the past two years and is stable and familiar.
Mr Sonego said both markets were appealing to buyers but the drivers of activity were different.
“North America is a large economy with a proven, captive population who demand quality goods and services,” Mr Sonego says.
“If you can break into that market, you have a strong population of consumers who are known to buy, and M&A is a well-understood entry option to the market.
“For Southeast Asia, the opportunity lies in the emergence of middle class consumers and wealth – new markets opening up with people who might not have previously been able to access your goods but who have growing and sustained demand.”
Reflecting the complexity of cross-border deals, large numbers of respondents expected to focus on their home markets for M&A, with 78% reporting they would search their domestic market before looking abroad for growth.
International M&A undoubtedly represents greater risk, particularly in the current global political and economic environment. This explains dealmakers’ relative caution about certain markets. The ongoing trade dispute between the US and China has unnerved many dealmakers, with 59% saying this issue was the top risk creating the most concern for their cross-border strategies.
“It’s difficult to see these risks receding in the near future and more dealmakers are likely to postpone M&A, particularly in the run-up to key events like Brexit and the US presidential election,” Mr Sonego said.
“However, these challenges may prove to be a spur to M&A, prompting businesses to rethink their portfolios and respond to change by pursuing new deals.”
Mid-market dealmaking (deal valued between US$15m and US$500m) hold great potential – and 67% of respondents agree that this segment will see the most activity in the year ahead.
“Buyers perceive small cap deals as too risky, given the fact that small firms often depend on a number of key people,” Mr Sonego said.
“The amount of effort and risk in small deals outmatches the return, whereas large deals often do not materialize either early-stage or last-minute because of legislative hurdles (such as antitrust issues).
“Mid-market deals, generally yielding better risk-return ratios and avoiding scrutiny from above, may therefore seem most attractive. More intuitively, the mid-market segment constitutes the most attractive targets given their proven business models and agility.”
In which specific countries will you invest in the next 1-2 years (Top 10 countries)
When completing cross-border deals, dealmakers face both big-picture concerns and technical challenges as they pursue acquisitions. Among their top concerns, respondents point to regulatory hurdles (81%) as the greatest challenge. Another 71% point to macro-economic and geopolitical uncertainties. In an uncertain world, where protectionism is on the increase and volatility is to the fore, these concerns do not look likely to dissipate any time soon.
“There are clearly challenges being faced due to the lack of certainty around the globe, but rather than inhibiting activity, it has in many ways become a driver of activity,” Mr Sonego said.
“We have now had uncertainty from Brexit for three years, we have had challenges between the United States and China for two years, and there’s a growing sense the disruption is the new normal.
“For some buyers that might mean wanting to wait on the sidelines, but for many others it has prompted deal activity as people try to manoeuvre around the challenges.”
At a deal process level, post-merger integration (77% of respondents) and deal sourcing (64%) are also significant challenges. The difficulty of performing thorough due diligence can also cause issues, with dealmakers now required to conduct more exacting scrutiny of every aspect of potential acquisitions in order to avoid bear-traps. Close to two-thirds (68%) of respondents say this is a primary concern as they pursue deals.
“The crucial message to buyers and dealmakers is the importance of due diligence, particularly when you need to consider factors beyond the financial, and look at the market, the political context and the local context,” Mr Sonego said.
“This is where good advice becomes critical and we are going to see a larger number of deals falling over in situations where that advice is not being sought or heeded.”
Additional key findings in Global dealmakers: Cross-border M&A outlook 2019 include:
- 35% of respondents believe cross-border M&A is a risk worth taking
- 49% expect to see increasing competition for assets in the year ahead
- Competition will be led by private equity and other funds (41%) and corporate buyers consolidating within their main industries (37%)
- The US is the top market where dealmakers will invest in the next 1-2 years
- TMT (77%) and consumer (61%) are top sectors of interest