Despite a fall in overall global dealmaking, M&A in the US has proved resilient, as megadeals and domestic activity boost the market
It has been a busy year for M&A involving US companies. While global deal value dropped compared to 2018, the US maintained its year-on-year total and took a greater share of the overall deal market.
Confidence in the US economy and the opportunities it offers companies for growth and investment led to a market driven by megadeals (valued at US$5 billion or more), with the life sciences and TMT sectors leading the way. Indeed, a full 58 percent of the US$1.5 trillion worth of deals involving US companies qualified as megadeals, up from 47 percent in 2018. And nine of the top ten deals for 2019 were domestic, suggesting that US corporate executives see plenty of opportunity in their home market.
Last year was also characterized by a growing breadth of M&A market participants. Private equity (PE) remained active, buoyed by strong fundraising and high liquidity in the debt markets. Family offices continued their expansion into direct deals. And sovereign wealth funds, many of which had pulled back from direct investing, returned to M&A markets, with the US as a target.
Rising stock markets and competition for deals led to further increases in company valuations in both public and, in particular, private markets. Many corporates opted for deals involving stock consideration to mitigate high pricing, while PE players sought smaller platforms through which to execute buy-and -build strategies as well as hunting opportunity in taking public companies private. These trends suggest that dealmakers are proceeding with confidence but also caution when it comes to pricing.
Talk of a downturn has been muted somewhat as we head into 2020—at least regarding the first half of the year. Economic growth will settle at 2.1 percent, according to the Conference Board. Unemployment is predicted to remain low, and financing for deals will continue to be widely available and low cost. However, with a presidential election in November, as well as ongoing headwinds such as trade wars and unrest in the Middle East, there is no room for complacency.
As the rest of the world backed away from the deal table, confident US corporates continued buying businesses—especially in the life sciences and TMT sectors, and particularly in the domestic market.
In line with the wider US M&A markets, PE deals held firm through 2019 with 1,329 buyouts, worth US$208 billion, representing a decline of 9 percent by volume, but just a 4 percent fall by value relative to 2018.
In terms of value, the technology and healthcare sectors—separately and, sometimes, in tandem—have ruled the M&A markets in 2019. Meanwhile, the consumer industry faced tough times—though there could be a rebound in 2020.
Technology continued to be among the most active subsectors for US M&A in 2019, with 1,138 deals announced worth a total of US$206 billion. This represents a marginal decrease of 3 percent in volume and 7 percent in value compared to 2018 activity.
Restructurings and uncertainty are hitting the US consumer sector. Retail M&A deal volume dropped 11 percent year-on-year to 459 deals, while deal value dropped 36 percent to US$76.87 billion.
The trend for megadeals in US real estate continued in 2019, with 38 transactions in the sector, worth a total US$56.6 billion—but overall deal volume was down 17 percent and deal value fell 25 percent year-on-year.
The healthcare sector (incorporating pharma, medical and biotech) has seen M&A valued at US$256.5 billion across 645 deals in 2019. This is a decrease of 9 percent by volume, but an increase of 121 percent by value.
M&A in the US oil & gas sector slowed in 2019, with 190 deals worth US$158 billion, down 38 percent in volume and 45 percent in value, mirroring steep declines in global M&A in the industry.
Dealmakers are placing more emphasis on sustainability in the context of their investment practices. This is occurring despite a lack of US federal regulation on companies’ sustainability reporting.
We focus on two H2 2019 rulings that could affect M&A transactions in the future.
After a solid 2019, the foundations are in place for a strong start to the M&A year in 2020. The following factors are likely to heavily influence the market in the months ahead.
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John Reiss |
Gregory Pryor |
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Chang-Do Gong |
Darragh Byrne |
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John Cunningham |
Alexandre Ippolito |
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Allan Taylor |
Baldwin Cheng |
As the rest of the world backed away from the deal table, confident US corporates continued buying businesses—especially in the life sciences and TMT sectors, and particularly in the domestic market.
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US dealmakers had a strong 2019, with 5,757 deals targeting US companies, valued at a total of US$1.53 trillion. This represents a 10 percent decline in volume, but value is practically the same as the previous year's tally, making it the third highest total on record. Meanwhile, global M&A value fell by 8 percent.
In addition, this value figure gave the US a global market share of 47 percent—the second highest percentage on record. Buoyed by confidence in the domestic economy, deals continued to get over the line in the US, while numerous other regions took a slight pause for breath.
In late 2018, fears of a trade war and concerns that a downturn may emerge during 2019 led to volatile public markets. But the Dow Jones Industrial Average was up by 23 percent in 2019.
The US economy is forecast to grow by 2.3 percent over the whole of 2019, up from just over 1 percent in 2018, according to The Conference Board, with 2020 set for continued moderate growth. When combined with labor market statistics, which show the unemployment rate stabilized at approximately 3.5 percent, the outlook is bright.
4,785
The number of US domestic deals in 2019
US $325.8
billionThe value of US inbound deals in 2019—an increase from the US$287
billion seen in 2018
This positive sentiment is reflected in the pattern of M&A activity for the year. Confident corporates did big deals to extend their geographic and market reach: Megadeals (those valued at US$5 billion or more) increased by 23 percent, from US$723.9 billion in 2018 to US$888 billion in 2019. They accounted for 58 percent of the total deal value for 2019, a significant increase on the 47 percent seen in 2018.
Megadeal activity was driven mainly by two sectors: life sciences and TMT. The former had the highest megadeal total, with US$180.8 billion across eight transactions, as Big Pharma companies increasingly seek defensive biotechnology products and capability. Meanwhile, TMT saw 11 deals valued at US$134.5 billion, reflecting the ongoing convergence of industries as digital disruption continues apace.
Activity involving large (US$1 billion to US$4.99 billion) and middle-market (US$5 million to US$999 million) deals was down by value and volume compared to 2018. High valuations may have played a role in this dynamic. The megadeals of 2019 often used stock consideration to mitigate the high cost of acquisitions. The largest deal of the year, Bristol-Myers Squibb's US$89.5 billion purchase of Celgene, is one example, as is the US$88.9 billion merger of United Technologies Corporation and Raytheon.
In the mid-market and below, buyers need to fund deals largely through cash and, despite continued liquidity in the debt markets and retained cash on balance sheets, buyers may be more circumspect when faced with high valuations. Companies that don't play in the megadeal space typically have fewer resources dedicated to M&A deals, and they may be more prone to caution in light of a possible downturn, particularly in a sellers' market dominated by auction activity. After several years of benign economic conditions, a survey carried out in the summer of 2019 by the National Association for Business Economics found that 72 percent of economists were predicting a downturn in 2020 or 2021.
With a strengthening of the Committee on Foreign Investment in the United States (CFIUS) regulations (see page 5) and ongoing uncertainty around the effect of US-China trade tariffs through 2019, it is perhaps unsurprising that domestic transactions dominated the megadeal space.
Nine of the top ten deals of 2019 were domestic, with only the UK-based London Stock Exchange's US$27 billion acquisition of financial markets data and infrastructure provider Refinitiv bucking the trend. However, the focus on large domestic deals also reflects greater appetite among US buyers for US assets, given the strength of the economy relative to some other markets (the European Union is forecast to grow by just 1.4 percent in 2019, for example).
While the focus at the top end was on domestic deals, figures across home-grown, inbound and outbound M&A mirrored the market's overall pattern. 2019 has seen 4,785 domestic deals worth US$1.2 trillion—a fall of 9 percent by volume and 4 percent by value year-on-year, which is similar to the overall market. The volume of inbound deals also fell by 13 percent to 972, while the value increased from US$286.5 billion in 2018 to US$325.8 billion in 2019, with outbound deal numbers dropping by 5 percent to 1,337 transactions and a consistent value of US$338.7 billion.
This is despite an increased focus on foreign acquirers by authorities in many markets, including the US, as well as greater coordination between countries on antitrust legislation (see page 7). For sellers, CFIUS has become a bigger issue when preparing for a deal and, while there may be additional scrutiny on the execution prowess of overseas buyers, the totals for inbound M&A suggest that increased scrutiny is not proving to be a deal-breaker.
In February 2020, new regulations implementing the Foreign Investment Risk Review Modernization Act (FIRRMA) will come into force. This is a major step in the overhaul of the foreign direct investment review process conducted by the Committee on Foreign Investment in the United States (CFIUS).
Some of the key changes involve an expansion of transactions that are included in the scope of CFIUS's jurisdiction, including certain non-controlling but non-passive investments in US businesses involving critical technology, critical infrastructure or sensitive data (referred to as "TID US businesses"). In addition, the new regulations expand CFIUS's jurisdiction to include certain real estate purchases, leases and concessions.
Prior to FIRRMA, CFIUS's jurisdiction was limited to foreign control of US businesses, and the CFIUS review was for the most part a voluntary process. Under FIRRMA, certain qualifying investments in US businesses involved with critical technology and investments by entities with substantial foreign government ownership in TID US businesses can be subject to mandatory filing requirements. And there are potentially harsh penalties for non-compliance!
Foreign investors take note
Companies will need to give greater consideration in the early stages of a transaction to both jurisdictional and substantive CFIUS issues. This means buyers (including investors purchasing minority stakes in TID US businesses) will need to conduct CFIUS-focused due diligence, which under the new rules can be a complex and fact-specific assessment, to determine whether the transaction triggers a mandatory filing. If not, they should then consider whether it is advisable to make a voluntary filing and what impact that may have on their bid. Finally, consideration must be given to whether a "fast track" declaration or a full filing is the best course.
Parties also need to be sensitive to these issues when allocating CFIUS risk in their purchase agreements. And if an overseas investor opts not to file, it needs to understand the risks of CFIUS requesting a filing. Notably, under FIRRMA, CFIUS has increased resources to pursue non-notified transactions and has been ramping up such efforts. Additionally, in 2018, CFIUS announced the issuance of its first-ever monetary penalty—a US$1 million fine—for violation of a mitigation agreement.
Over the past few years, family offices have become an increasing force in the investment and deal markets. A recent study by Campden Research estimates that the total assets under management among the projected 7,300 family offices worldwide currently stands at US$5.9 trillion.
The proportion of family office capital flowing towards private companies is also on the rise, both through traditional private equity funds and direct private investments. And investors are achieving strong returns with these strategies. A Family Office Exchange report from June 2019 found that private equity fund investments by family offices averaged 11.1 percent in 2018, with direct investments averaging 16.8 percent.
According to a 2019 UBS study, 39 percent of family offices expect to increase their allocations to direct investments in 2020. While a number of these investors may have cut their teeth on co-investments alongside private equity funds, it seems that many are now starting to seek out deals for themselves. This affords them the opportunity to do away with the fee structures associated with fund investments as well as offering them far greater control over investments.
Family values
In addition, family offices are taking different approaches to direct investment than those taken by private equity. Family offices often have longer investment horizons than traditional funds and so can appeal to other family business sellers who wish to retain a stake over the long term and can tolerate longer market cycles.
They also tend to favor local investments (85 percent of North American family offices are more likely to invest in North American companies, according to a FINTRX Buy-Side study) and investments with a direct link to their experience and background.
Family offices are also more focused on the social and environmental impact of the investments than many buyout firms—a third of family offices engage in sustainable investing, according to the UBS survey.
As the firepower of family offices increases and their appetite for direct deals grows, they could become a significant competitor to private equity. However, it also seems likely that family offices will target somewhat different investments, thus adding to the private company financing ecosystem at a time when more companies are opting for a private as opposed to public ownership structure.
Canada was the most active acquirer of US businesses, accounting for 203 deals worth a total of US$55.1 billion, even as the US-Mexico-Canada Agreement (USMCA) trade agreement remained unratified at the end of 2019. The largest inbound deal with a Canadian bidder was Brookfield Asset Management's US$9.6 billion purchase of Oaktree Capital. The UK was in second place for value and volume, with 164 deals worth US$49.8 billion led by LSE's acquisition of Refinitiv for US$27 billion. China hasn't been a top ten bidder for inbound US deals since 2017, when it ranked sixth by volume and seventh by value.
Over the last decade, the number of transactions reported to antitrust authorities in the US has risen significantly. In 2009, there were 716 reported deals; by the fiscal year 2018, this had risen nearly threefold to 2,111 deals.
Interest from US antitrust authorities has generally been steady but is rising in certain areas. While there is a trend toward greater scrutiny of certain M&A activity in the US, what is less clear at this stage is the extent to which we will see an overhaul of antitrust.
One area of increased and demonstrated interest is in examining the effect of vertical mergers. Though the DOJ's attempt to prevent the AT&T–Time Warner tie-up failed, the FTC and DOJ in January jointly issued draft Vertical Merger Guidelines for public comment. This much-anticipated update to the 1984 guidelines gives a framework for evaluating vertical mergers under the antitrust laws. While reflecting "new economic understandings", the draft guidelines largely follow and attempt to define and frame what is essentially an existing consensus view on analyzing the competitive effects of vertical mergers. The fact that the guidelines have been issued shows that vertical mergers will continue to be an area of interest for the FTC and DOJ.
Don't wait—act on antitrust
Companies engaging in M&A on both buy- and sell-sides will need to continue to consider early on whether a transaction is likely to raise antitrust questions, and what remedies may be required. These are considerations not just in a US context. The increase in mandatory pre-merger clearances globally means parties need to organize their global clearance strategies carefully to ensure consistency in advocacy and timing.
As we move into 2020, it seems likely that M&A activity will continue to be robust as long as the economy continues to grow and confidence remains high.
There are some concerns about an eventual downturn, but that inevitability provides opportunities for buyers that are experienced with distressed assets. The upcoming Presidential elections may also have an effect on M&A activity, particularly depending on which Democratic candidate wins the nomination. But we'd expect activity to be brisk in the early part of the year, as companies seek to complete deals well ahead of any potential change in administration.
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US M&A 2013 - 2019 (PDF)
US M&A value by deal size 2018 and 2019 (PDF)
Top ten US M&A deals 2019 (PDF)
US M&A: Domestic, inbound and outbound value (PDF)
Inbound (top 10 countries)
Top 10 US M&A deals 2019 inbound (PDF)
