Thanks to unprecedented activity in recent years, mergers and acquisitions (M&A) is currently one of the most captivating markets in the financial sector. Though some suggest this activity is beginning to slow (and, potentially, leaning towards increased volatility), the impact of the last few years cannot be overlooked, and its quick-moving nature has been driven by a variety of prevailing trends, many of which remain ongoing.
That said, here is a brief look at several of M&A’s main driving forces in 2019 and beyond.
Private equity has been cited as a primary spurring variable in recent M&A activity, with such transactions representing close to 30 percent of all US deals (measured by value) in Q1 2019 alone. This spike in activity has followed a slow ascent since the 2008 financial crisis, growing at a compound annual growth rate (CAGR) of 20 percent. Collectively, these transactions have eclipsed $741 billion in total deal value. Moving ahead, expect private equity — an already popular asset class — to further establish itself among investors.
Lately, an increasing amount of shareholder activists have adopted M&A as a “core theme of their campaigns,” elevating in percentage despite a slight Q1 regression in the number of US companies targeted by such activists. Whether they are focused on supporting or disrupting M&A deals, these activists have generally shaken up the M&A market, with 18 such campaigns advocating for M&A and 11 opposing them. Now, activism activity is beginning to transcend the US market, spreading to Europe and Asia-Pacific.
Regulatory development remains arguably one of the most significant developments within M&A — namely, the expansion of the Committee on Foreign Investment in the United States (CFIUS) by the Foreign Investment Risk Review Modernization Act (FIRRMA). As noted within the Harvard Law School Forum on Corporate Governance and Financial Regulation, “interim regulations released by CFIUS in October 2018 have added to the chilling effect on Chinese investments in the U.S., particularly in the technology sector,” which, when paired with increased trading tension between the US and China, has only stoked the expectation that Chinese authorities “may take stricter stances on approving transactions involving US firms.”
Scope vs. Scale
In 2018, for the first time, there were more recorded deals done for scope acquisitions rather than scale-based ones; this shift as endured as a significant disruptor in M&A as a whole. For a while, scale stood as a primary focus for strategic buyers, but now, due to “the rise in private equity investment and reach,” scope acquisitions have gradually closed the gap in recent years. This trend indicates that an increasing amount of buyers are moving to acquisitions capable of expanding their respective capabilities. Bain and Company’s 2018 report on M&A also highlights “a four-fold increase in corporate venture capital investment since 2013,” indicating that many lower middle market acquisitions are now scope-driven and mainly concerned with companies rooted in “innovative technologies” like the Internet of Things.