Buoyed by tax reform, a more relaxed U.S. regulatory climate and growing cash reserves, U.S. dealmaker optimism is at a three-year high. Most are anticipating more and bigger merger and acquisition (M&A) deals in 2019, according to Deloitte’s “The State of the Deal: M&A Trends 2019”, a survey of 1,000 U.S. corporate dealmakers and private equity firms.
About 79% of all respondents say their organizations will close more deals in the next 12 months and 70% expect the size of transactions to be larger than those closed in the preceding year.
“Our respondents seem to predict another active M&A year ahead,” said Russell Thomson, managing partner of Deloitte’s U.S. M&A services practice. “But, deal making may look a bit different in 2019 with a heavier emphasis on more traditional customer base expansion and diversification of products and services, rather than technology plays. According to our survey, an increasing number of organizations also appear to be looking to accelerate deal making to take advantage of current domestic policy.”
More than half (53%) of all respondents say that tax reform provides them with additional capital to facilitate transactions. Nearly as many (44%) report that a more relaxed regulatory environment will drive more deal activity in the year ahead.
Respondents were more split on the impact rising interest rates could have in 2019. 41% say higher rates will slow activity or reduce their ability to execute deals, however, 45% say rising rates will accelerate deal activity.
Just 35% of all respondents say that global trade uncertainty is reducing interest in deal-making. But, private equity respondents say ongoing tariff negotiations negatively impact their portfolio companies’ operations (58%) and cash flows (55%).
Despite the strong deal environment, 40% of all respondents say that up to half of their deals in the past two years failed to generate expected value or return on investment. Economic forces continue to be the top reason deals fail to generate expected value for both corporate and private equity respondents (38%).
Among private equity respondents, the impact of regulatory forces on deal failures jumped to 35% from 26% a year earlier. Further, there’s a surge in private equity respondents who say underperforming deals fail to achieve revenue synergies (29%, up from 19% a year ago), as well as a jump in deals that fail to align culturally (19%, up from 14% in a year).
Thomson added, “The tenets of effective deal making have not changed. Executives consistently tell us that having a well-defined strategy and approach — spanning the full lifecycle of the deal inclusive of execution, due diligence and post-merger integration — has been key in helping their organizations’ deals realize value.”
Most respondents (93%) expect some of their organizations’ acquisitions to be made in foreign markets in 2019 and one-third expect half of their M&A deals to involve acquiring targets operating principally in foreign markets.
Canada (42%) again tops the list of foreign targets for all respondents for the third consecutive year. And, amid growing trade tensions, China jumped to second place (28%, up from 18% last year), tying with Europe excluding the United Kingdom (28%). In the year ahead, respondents are less interested in pursuing deals in the U.K. (24%, down from 29% last year). The popularity of most of the top foreign markets for deal making hit a three-year high, except for the U.K.’s slight slip in that ranking.