Big-ticket merger and acquisition (M&A) transactions are what welcomed 2018
Right now, the energy and appetite for M&A appears to be ramping up. Following some major acquisitions in the final quarter of 2017, there is a renewed energy and enthusiasm within the M&A environment. From 21st century Fox merging with Disney, to Johnson and Johnsons’ acquisition of Actelion, last year saw some exciting deals and transactions to shout about. So, given the volatility and uncertainty of changing political and financial landscapes, why are companies looking to do more M&A?
- The M&A market is strong
Given the turbulence of the US and European political landscapes over the last year, global M&A has surprisingly surfed the waves and coped with the uncertainty. It goes without saying that, when operating in a strong market, many more companies are willing to consider M&A. Large transactions always encounter an element of risk, therefore the security of the business landscape has an important impact on a company’s decisions. The healthier the market, the better.
Globalisation continues to play a big part in the world of M&A. Cross border M&A is highly regulated and scrutinised but remains strong and prosperous. China’s ambition for overseas mergers will also drive activity in this area. Global M&A is certainly one to watch in 2018.
- IPOs driving M&A activity
It’s well known that in the few years following IPO, companies are more determined to undertake an M&A. Research shows that newly public firms experience more growth through acquisition than research and development or capital expenditure. So, why is that the case?
- Companies often have more money to play with following IPO. Seasoned equity offerings and public debt offerings give the company more financial options.
- Once a firm has gone public, its value is more transparent to potential targets. Also, the firm itself learns more about its own worth by entering the public realm. This mutual clarity helps foster new opportunities for both acquirer and target. Win win.
- Stocks can be used as acquisition currency, giving the acquirer exactly what it needs to make an M&A happen. Publicly traded stock can help to finance the takeover.
When firms are matured, having merged over 10 years ago, a new wave of merger activity starts to take place. This shows the interconnection of IPO and M&A activity. IPO is a true driving force for M&A activity.
- Spending overseas cash
US tax reforms have encouraged some companies to repatriate offshore cash back to the US. Soon companies may have to share their capital return plan with their shareholders. If that’s the case, many would prefer to invest their cash in M&A than to see it handed back to shareholders.
As stated in the New York Time, “Roughly 31 percent of respondents to a survey of deal makers by the Brunswick Group, a financial public relations firm, cited “corporate tax reform” as the biggest driver of mergers in 2017.”
So, why do we predict that repatriation leads to greater transactions? Well, in the fall of 2004, Congress created a one-off ‘tax holiday’, when firms could bring cash back to the States at a tax rate of 5.25%. The rate of deals increased by 9% in 2005 and, by 2006, mergers were up a whopping 26% above 2004. Assuming the same pattern follows, we could expect to see a surge in M&A activity due to changes in US tax policy.
Overall, M&A is in a strong position for 2018. As ever, we must watch this space to see how which transactions, deals and acquisitions take the spot light this year. Despite a turbulent geo-political landscape, an air of positivity and proactivity remains in the world of M&A.
So, having read about the M&A market, IPOs driving M&A activity and the knock-on effect of US tax reform, what does this mean for your company? In terms of next steps, it might be time to undertake a full competitor review or to find out if any of these three points apply to you directly. Ask yourself, how does M&A activity in the outside world impact the world in which my business operates?