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Strategic M&A — Trends and Outlook

Many factors aligned to make 2017 a good year for mergers and acquisitions. What is the forecast for 2018?

“It’s a fascinating and unique time in the mergers and acquisitions world,” says Aly Alibhai, Managing Director in the Mergers & Acquisitions group at Citigroup Global Markets in New York. Digital disruption and companies’ search for scale are key drivers, underpinned by a generally healthy global economy.

Alibhai recently spoke to YPO members in a Deal Networks‘ global conference call about trends in M&A and the outlook for 2018. Companies looking to engage in M&A activity in the near future (and companies wishing to avoid being the target of an M&A effort) will find his insights of great interest.

Trending in 2017

There were many trends in 2017 that supported the growth of M&A activity. Alibhai singled out a few: record valuations and historically high multiples, a strong financial environment characterized by high demand from investors and low rates, and the dominance of sector and technology convergence. As a result, 2017 was the second-best year (after 2015) for M&A activity since the 2009 global recession.

“Technology was a dominant driver in 2017 and its related M&A activity tends to take several different forms,” noted Alibhai. Traditional players, such as retail, look to enhance their online presence. Corporations want to invest in next-generation technology (with special focus on autonomous cars). Legacy companies seek to use technology to acquire expertise and/or streamline the business.

Global activity down, hostile activity up

Cross-border M&A activity reached record post-economic-crisis volumes in 2016. However, that trend did not continue in 2017, when M&A activity took on a more regional view. The probable reason is political uncertainty in various areas of the globe, such as the United States (a new administration), Europe (the Brexit vote) and Asia (the Chinese government’s crackdown on outbound M&A).

Conversely, hostile activity increased in 2017, up 22 percent over 2016. The environment was favorable for such activity due to increased CEO and board confidence, companies’ reduction in takeover defenses, favorable capital market conditions for large transactions, and organizations’ limited ability to create earnings growth through increased efficiency. Still, Alibhai urges companies considering hostile activity to exercise caution. “Strategic bidders who were patient and thoughtful, and did not overpay, realized positive performance. Hasty bidders were beaten up by investors.”

Desirable disruption

A 2017 trend that is likely to continue in the future is digital disruption, which Alibhai defines as the acquisition of technology companies by non-technology companies. Two notable examples are Intel’s acquisition of Mobileye and Samsung’s acquisition of Harman. Such deals are characterized by their proactivity. Companies are not simply reacting to another marketplace event; they are thinking strategically about what they will need in the future and being proactive about acquiring it.

Companies planning to engage in disruptive M&A activity must comprehend the forces outside the business, including 10- to 15-year scenarios; understand where they can retain and/or capture value; and determine the actions/decisions that best position them to optimize their value in a changing landscape. A key step is to fortify the base — that is, secure the “cash cow.”

Outlook for 2018

M&A activity historically mirrors three macro trends:

  1. Performance of equities. Alibhai notes that although Standard & Poor’s shows some indicators of a bear market, no bear market is currently predicted.
  2. Consumer and CEO confidence. Passionate belief in the business, the strategy and the ability to extract value from a target lead to high confidence, which makes for a better M&A environment.
  3. If volatility persists, it can be detrimental for M&A, but short periods are generally favorable to acquirers, who move opportunistically to make deals and traditionally are rewarded for doing so.

These trends are currently positive. Coupled with strong corporate fundamentals, synchronized global economic growth and investors’ cash availability, they would tend to indicate a favorable environment for M&A in the year ahead. However, certain risks could change that outlook: geopolitical shocks, regulatory uncertainty and a flattening yield curve. Alibhai counsels taking a customer-focused view: “You need to be carefully assessing how your customers are consuming your content or your products. How can you make it easier or better for them? Doing nothing is not an option.”