Despite all the news flow, uncertainty and challenges of the macro-political environment, 2016 has been a relatively good year for global M&A activity. The volumes were lower than the previous year, but 2015 was the second best year on record (only behind the dotcom peak in 2000). Given the cyclicality of the industry, the key question is whether 2015 was a peak, which marks the inflection point of the cycle, or if, while being slightly below 2015, 2016 is another good year which precedes a healthy 2017.
All the key geographies face relevant economic and often social challenges:
- The US faces the new Trump presidency and a highly fragmented society
- The UK Brexit
- Europe a new wave of populism, several key elections ahead and a mediocre economy
- China with severe questions around the sustainability of its growth
- And all the other emerging markets with the caveat of the potential impact of higher rates in the US
Given the proven correlation of GDP growth with M&A activity, one could thing that the combination of all these factors will take a toll in the next few years.
However, it is also proven that the M&A industry, and the broader advisory world, have been able to navigate the previous crises remarkably well. In fact, there are even counter-cyclical products that flourish when the traditional or “healthy” M&A is suffering, such as debt restructuring or liability management. Also, a world with lower earnings growth but more sanitized balance sheets, as it seems to be the case today, is a very good environment for domestic M&A, if only because it creates earnings growth through cost cutting.
Similarly, given the lower investment returns, activist investors are emerging as a new catalyst for disposals or even full sale of the company. The higher market scrutiny is actually forcing CEOs to start thinking more like activists themselves, and embark in more thorough analyses to determine which assets or businesses are truly core, and which ones should be divested. All these factors provide opportunities that should, to a very large extent, offset the lack of other M&A transactions.
Because there may be fewer transactions in other segments, it is hard to ignore the potential impact of Brexit. With a high level of uncertainty around the outcome of the negotiations, activity might be lower for the next few months, as some acquirers put their plans on hold, or as Private Equity buyers take a pause for breath until they learn more around the new framework. Brexit may be potentially good for inbound acquisitions, probably after a few months once the situation starts to stabilize, mostly due to the weaker sterling.
Similarly, a slower economy growth could boost some domestic transactions aimed at cutting costs in a more challenging environment. Not to mention potential distressed situations.
But more importantly than the short term impact on M&A activity, there is one question in the air, and that is if the UK will be able to retain its current status of preeminent location for the European financial industry in a post Brexit world.
Listening to M&A practitioners, one of the issues that they find more concerning is that there is a lot of supply. The downturn has not eliminated much installed capacity in the industry. In fact, the aftermath of the crisis has brought a new competitor, the M&A boutiques, which have been founded by senior investment banking professionals which left bulge bracket investment banks with years of experience and trust relationships with key CEOs and board members. Some of these boutiques have been remarkably successful. And all of that, combined with a lower deal activity and an increased focus on controlling costs by the corporate world, is resulting in increased fee pressure.
To fight this challenging environment, advisers have embarked in a series of initiatives with the objective of differentiating themselves and specialising in certain sectors. Technology transactions would be a good example. There is a strong buyer interest, both by large incumbents and by Private Equity buyers. And there is a specific skillset required, that often only highly specialized advisers have, which allows them to justify higher fees. This may become a template for other highly specialised and attractive sub-sectors in the advisory world.
Lastly, the abundant investor liquidity and the search for dividend yield in a low interest rate environment have resulted in a constructive IPO market. In fact, there have been several dual-track processes in Europe where the IPO valuation resulted in a higher price for sellers than M&A valuations. The pity in 2016 was that this healthy IPO market was interrupted by several geo-political events that introduced significant uncertainty and effectively close down the equity market for several weeks (China fears in the beginning of the year, Brexit in June, and to a lesser extent the pre-US election weeks in late 2016). Let´s hope that 2017 shows a more consistent IPO market, with less volatility, which would result in much higher IPO volumes.
This conference draws together the leading experts who will provide commentary on many of these themes and an insight into the key issues and trends affecting the industry. Attendees will have the opportunity to ask questions and exchange views with the expert presenters.
I look forward to welcoming you on the day of the conference.