Global deal-making will experience a continued hangover in 2020 thanks to ongoing worldwide economic uncertainty and the risk of global recession, according to new report by Baker McKenzie.
The report also reveals that the deal flow in North America is an outlier to the global trend, while technology, investor activism and private equity take center stage in pushing transactions forward next year. The firm’s fifth annual Global Transactions Forecast, produced in conjunction with Oxford Economics, projects that merger and acquisition value will decline globally from $2.8 trillion in 2019 to $2.1 trillion in 2020. The report predicts a downward trend in IPO proceeds from an estimated $152 billion in 2019 to $116 billion, a 23 percent drop. Amid the global slowdown in the transactions pipeline, there are three main deal drivers for activity in the foreseeable future. The first is technological disruption, where across all sectors companies will seek to acquire advanced digital capabilities that they cannot replicate in-house in order to remain competitive. Secondly, activist funds and stakeholder capitalism spurring activist investors and a heightened emphasis on stakeholder capitalism, which will keep pressure on boards to re-structure and respond accordingly with strategic changes. Lasrtly, private equity ‘dry powder,’ where private equity investors may seize upon the opportunities created by market volatility and keep transaction volumes afloat. “Make no mistake - deals are getting done, but the current slowdown is inevitable considering the continuing uncertainty around trade and regulation,” said Ai Ai Wong, chair of Baker McKenzie’s global transactional group. He explained, “We know that around the world, there are many investors and companies with capital on the sidelines, waiting to move forward with domestic and cross-border deals.”
In North America, easy financing conditions, the impact of earlier tax cuts and the strength of the US economy relative to Europe and Asia are driving deal activity in the US to date. A few headline-making transactions this year include the $84 billion acquisition of 21st Century Fox by Walt Disney; DowDuPont’s $40 billion spin-off of Dow Inc.; and the $8.1 billion Uber IPO. North America is expected to end 2019 with $1.5 trillion in domestic and cross-border M&A, an 8 percent decrease from 2018. For 2020, the Baker McKenzie report forecasts $1.1 trillion in deals. “Coming off of 2018’s highs, dealmakers in North America have had a fairly busy 2019, even though cross-border transactions activity is down,” said Michael DeFranco, global chair of Baker McKenzie’s M&A practice. “Right now though, investors are becoming concerned about high valuations and rising corporate leverage, and we’ve seen the market respond less-than-favorably to a number of large deal announcements recently. Going forward, we’re working with clients on planning for a deceleration, though a recession in the US is not likely in the cards.”
Many factors have impacted European deal activity, including the slowdown in global trade, Germany’s economic slowdown, and the constant uncertainty of Brexit. There is notable decreased appetite for acquisitions, and to make matters worse, European governments have increased regulatory scrutiny significantly in 2019. The same holds true for the equity markets, as many European companies were reluctant to move forward with IPOs in 2019, as IPO value dropped 60 percent from 2018 to $15 billion. The forecast predicts 2020 to continue this trend with European M&A activity falling from $567 billion in 2019 to $427 billion in 2020, a 25 percent decline.
Due to a significant slowdown in cross-border activity particularly, Asia-Pacific dealmaking has fallen from highs in 2018. The US-China trade dispute was clearly evident, as well as sluggish Chinese outbound deals due to Chinese government scrutiny on outward investment by private firms. Japan has proven to be the exception to the slowdown, as conglomerates sell non-core assets and companies look for outbound acquisitions. In addition, Indonesia, Thailand and Vietnam have seen strong inbound activity. The forecast predicts M&A activity declining 18 percent from $634 billion in 2019 to $529 billion in 2020, and IPO activity will likely continue its slower trend from this year, expected to amount to $36 billion, a 43 percent decline from 2018.
The 2019 deal environment in Latin America varied greatly depending on country. In Brazil, investor-friendly policy reforms have driven a healthy level of activity, but political and economic turmoil in other areas are exacerbating the negative effects of an already adverse external environment for Latin America. A drop in M&A activity is expected in 2020 from $90 billion in 2019 to $77 billion. The IPO market should also slow with hope for a rebound in 2021, as confidence builds in new governments and reforms.