Overview
In the first nine months of 2018, global M&A activity hit a record of $3.3 trillion, which represents an increase of 37% compared to the same period in 2017. However, the number of deals declined by 9% compared to 2017, representing the lowest deal volume in three years. Based on target industry, the consumer products and services industry and the retail industry each represented 4% of total worldwide announced M&A.1
According to reports by PwC, for US consumer markets M&A activity through Q3 2018 there was a year-over-year decrease in deal volume of 11.9%, but an increase in total deal value of 11.8%. Based on sector category within consumer markets, for the consumer sector, there was a decrease in total deal value of 23.1% and a decrease in total deal volume of 20.5% compared to the same period in 2017. The retail sector experienced a decline in total deal volume of 18.2%, while total deal value remained relatively flat with a slight decrease of 1.7%. Year-to-date as of the end of Q3 2018, the top three consumer markets subsectors based on announced deal value were food and beverage ($55.6 billion), other consumer products (including products such as appliances, furniture and consumer electronics) ($24.7 billion) and grocery, drug, discount and mass ($23.3 billion). The top three subsectors based on the number of announced deals were other consumer products (228 deals), food and beverage (208 deals) and specialty retail/other (including electronics, home improvement, auto repair and other categories) (186 deals). In Q3 2018, smaller transactions of $50 million or less became increasingly popular, with such transactions accounting for 61% of total deals, compared to 54% of deals in Q2 and 59% of deals in Q1.2
Looking Ahead to 2019
Although M&A activity continues to be strong, factors such as global trade policy, rising interest rates and market volatility could affect deal volume in 2019. The trade war between China and the United States, continued threats by President Trump to withdraw from NAFTA before the newly signed United States-Mexico-Canada Agreement takes effect in 2020, and the impending Brexit all threaten to negatively impact M&A, particularly cross-border deals. Additionally, interest rates have been rising and are expected to keep climbing, which could increase the cost of capital for transactions. Stock markets experienced volatility at various points throughout 2018, with the Dow Jones Industrial Average not only closing at a record high and having the third-largest one-day point gain in its history, but also experiencing the four largest daily point losses on record.3 Although some of the volatility has been attributed to fears surrounding the US/ China trade war, after a long bull market, there is also some speculation whether the next bear market may be afoot.
Despite the economic uncertainty created by the aforementioned and other factors, a Deloitte 2019 M&A trends report shows that there is still a healthy appetite for M&A heading into 2019, with 76% of domestic corporate M&A executives and 87% of domestic private equity M&A executives expecting the number of M&A deals to increase over the next year, and 70% of executives expecting an increase in average deal value. Many executives expect that rising interest rates may lead to an accelerated pace of M&A activity in 2019, in order to close deals before interest rates increase further.4 Notwithstanding some unfavorable global trade policy developments, corporations and private equity firms still view Canada and China as the top most likely international markets for M&A. The lingering impact of tax reform and increased corporate savings could also encourage deal activity. Overall, while at first glance market conditions may appear to be poised to slow down M&A activity, there is reason to remain optimistic that there will not be an immediate sharp decline, as companies and private equity firms still seek to engage in strategic transactions.
Footnotes
1 http://dmi.thomsonreuters.com/Content/Files/3Q2018_MA Legal_Advisor_Review.pdf
2 https://www.pwc.com/us/en/industries/consumer-markets/assets/pwc-us-consumer-markets-deals-insights-q3-2018.pdf; https://www.pwc.com/us/en/industry/assets/; https://www.pwc.com/us/en/industry/assets/pwc-us-consumer-markets-deals-insights-q2-2018-final.pdf; https://www.pwc.com/us/en/consumermarkets/assets/pwc-us-consumer-markets-deals-insights-q1-2018.pdf
3 https://www.cnn.com/2013/05/31/us/dow-jones-industrial-average-fast-facts/index.html; https://markets.businessinsider.com/news/stocks/dow-jones-stock-market-news-today-trump-china-march-26-2018-3-1019458619; https://www.businessinsider.com/largest-stock-market-drops-in-history-2018-2; https://www.cnbc.com/2018/12/04/stock-market-dow-futures-fall-amid-us-china-trade-deal-skepticism.html
4 https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/ma-trends-report.html
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