Sector Convergence will drive dealmaking as companies require transformative responses to technology

New York-According to the 2019 M&A sector outlook by Ernst & Young LLP (EY) Transaction Advisory Services, sector convergence will drive transformative M&A activity in 2019, enabling companies to adapt to pressure from more technologically savvy competitors and increasing activity from activist investors, private equity funds and newly vulnerable global supply chains. In response to new enterprise technologies reshaping the private sector, near-record levels of US M&A are poised to continue into 2019 as businesses reformulate their capital agendas — unconstrained by sector boundaries more than ever before.

Year-to-date, there has been an increase in deal volumes (up 8%) and values (up 55%) for announced transactions over US$100 million, with several multibillion-dollar deals across key sectors, including media and entertainment, health care, financial services and energy. In fact, 2018 has seen the most amount of deals in the US$5 billion to US$10 billion range on record.

Divergence and disruption were the largest contributors to 2018’s banner M&A environment, backed by the continued support of credit and sustained global GDP growth. EY anticipates an active dealmaking climate to persist into 2019, supported by portfolio rationalization, deconglomeration, divestitures and the pickup in private capital available to absorb these assets. However, the organization encourages dealmakers to remain conscious of potential pitfalls as they reshape portfolios and capital allocation strategies.

“Executives are facing a chessboard of challenges — including emerging technology, volatile equity markets and changing geopolitics — that are adding unparalleled complexity to their organizations’ transformation strategies,” said Bill Casey, EY Americas Vice Chair, Transaction Advisory Services (TAS). “In response, they are actively pursuing dealmaking to help achieve their near- and long-term goals. The US economy is holding steady as corporate earnings show strength, even in the face of rising interest rates. Encouraged by this backdrop, corporations will actively reformulate their capital agendas, focusing on a narrower set of priorities that will lead them to acquire and divest to keep pace with competitive pressures.”

The report outlines several other themes anticipated for transactions in 2019, including:

  • Technology to spur more cross-sector deals: New technologies, including “direct-to-customer” web platforms, automation, the Internet of Things (IoT) and cloud computing networks, continue to develop and impact traditional business models. New capabilities are further blurring lines across sectors, disrupting supply chains and changing consumer preferences. To compete, companies will tap M&A to reinvent themselves for a digital, internet-focused economy. 
  • Buyers focus on integration to optimize M&A and grow: More companies are refining their approach to integrating new acquisitions, a multifaceted process that spans the reorganizing of workforces, operations, accounting and long-term strategy. EY’s recent Capital Confidence Barometer found that 62% of executives achieved lower synergies than expected in their most recent transaction, and a majority (56%) say they are starting integration earlier in the M&A process. The challenges and opportunities of integration will be top of mind for dealmakers in 2019.
  • Private capital investments to increase: The diverse and growing number of private investment funds with record levels of dry powder drove deal activity in 2018 and will continue to do so in the year ahead. With more private investors looking to source deals from corporates and more activist shareholders looking for yield, companies are increasingly divesting non-core assets, consolidating their growth strategies and optimizing capital agendas. We expect to see more carve-outs, buy-and-builds and co-investment partnerships that capitalize on favorable debt markets.

Business executives are cognizant of changing trade policies and tariffs, but they anticipate M&A to be used to ameliorate these shifts. According to the recent EY Trade Barrier Impact Survey, 86% of US executives impacted by tariffs plan to pursue M&A in response to trade restrictions, while 84% are reviewing or have already made changes to their procurement strategy, global manufacturing footprint, global warehouse strategy or network design.

About the 2019 M&A sector outlook report

The report, Transformative M&A for a changing world, provides the dealmaking outlook for 2019 and in-depth sector perspectives from EY’s sector leaders representing technology, private equity, consumer products and retail, manufacturing, financial services, and life sciences.