Article Synopsis :
This report from Deloitte on the state of M&A headed into 2018 is based on a survey of more than 1,000 senior executives directly involved in M&A activities working in both corporate and private equity. At a high level, both corporate and private equity respondents foresee an acceleration of M&A activity in 2018—both in the number of deals and the size of the transactions.
Specific findings include:
Tools and technology are making an impact: Almost two-thirds of respondents (63%) are going beyond the spreadsheet and using new M&A technology tools to assist with analysis, reporting and integration. Respondents say the tools help reduce conflicts, costs, and time—likely key factors in making more deals work.
In it for the technology: Technology acquisition is the new No. 1 driver of M&A pursuits, ahead of expanding customer bases in existing markets, or adding to products or services. Talent acquisition continues to trend upward as a motivation for M&A strategies. 12% of respondents cite digital strategy as the driving force behind M&A deals for the coming year; combined, acquiring technology and/or digital strategy accounts for about a third of the impetus for pursuing deals.
Bigger firms are more confident: Corporate executives and private equity investors from the largest firms—with revenues and investments in excess of $1 billion—are considerably more confident than their smaller counterparts that they’ll engage in bigger deals in the coming year.
Deals are working better: Only 12% of corporate respondents say a majority of their M&A deals are not generating the expected return on investment. This is down from just under 40% in spring 2016. An even slimmer number of private equity survey respondents (6%) rate a majority of their deals as underperforming—this is consistent with what respondents reported a year ago and continues the downward trend from a high of 54% back in spring 2016.
Full speed ahead for divestitures: Divestitures should persist as a major focus in 2018. 70% of survey respondents plan to shed businesses next year—driven by financing needs and strategy shifts.
Driven by convergence: Industry and sector convergence continue to be major themes, with a strong bias toward vertical integration. Top industries predicted to experience convergence are life sciences and health care, technology, and financial services.
Corporations have spending firepower: More companies say their cash levels have increased, and M&A remains the No. 1 intended use of funds.
Interest in global deals wanes: A marked downtick in global deals is expected, with far fewer US-based acquirers looking to Asia (China and Japan mainly), Brazil, Italy, and Spain for acquisitions. For these five countries alone, interest among deal seekers is down an aggregate 26% compared to a year ago.
Macro headwinds, though less of a concern this year, still exist:
- Global economic uncertainty still tops the list of potential deal obstacles, with 20% citing it as a concern, down from 26% last year
- Capital market volatility was cited by 17% of respondents, down from 21% a year ago
- Deal valuations ticked down nominally as a leading obstacle, to 15% of respondents from 16% a year ago Expectations around deal multiples have remained steady with about 41% of respondents seeing price multiples rising for both private and public deals in the year ahead
- Interest rate concerns dropped the most precipitously, to 11% from 17% last year. The decline may be tied to the fact that today’s rates—despite a series of hikes by the Federal Reserve this year—are still quite low historically
Bottom line, corporate respondents are narrowing the geographic field of potential targets as significantly fewer are looking abroad for deals. But with cash reserves up for the second year in a row for two-thirds of this group, and M&A deals stated as the primary use of those reserves, 2018 looks like a robust year for M&A overall.
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Digital Insurer's CommentsReviewing reports on this topic as recently as three years ago, the ‘acquisition of technology’ was at or near the bottom of the list of M&A drivers. My, how far digital has come in such a relatively short time frame.
Buying technology and integrating it into an existing operating environment are two different things. Technology due-diligence, i.e., the detailed mainly technical assessment of how well a targeted technology fits into the stack of an acquirer, is a crucial step that should not be skipped. Mapping precisely how the new will work with the old (if at all) accelerates returns on invested capital.
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