At this time last year, uncertainty surrounding Brexit, the stunning outcome of the US presidential election and looming referendums in France and Germany gave corporate executives fair reason to be cautious about deal making. The value of European M&A fell about 10 percent in 2016, though it still ended as a respectable follow-up to a record year.
Fast forward 12 months, and it has been another solid year for buyouts. While Brexit and other political uncertainties still linger, stronger-than-expected economic activity in the Eurozone, stability in financial markets and historically low borrowing costs support an optimistic outlook for future M&A transactions.
A recent Deloitte survey signalled support for positive deal-making sentiment, noting “the proportion of UK chief financial officers expecting M&A activity to decrease over the next three years has dropped from 40 per cent last year to only 11 per cent.”
In 2017, the UK M&A market represents a 21.4% share of European deal-making by value. Thus, the region provides a solid indicator of the confidence prevalent across the rest of EMEA, which is also reflecting a healthy M&A environment.
This significant shift in sentiment from a year ago aligns with what Merrill Corporation is seeing in terms of our record volume of projects on the Merrill DataSite virtual data room platform.
Merrill noted a 12.6% YTD increase in new DataSite projects in EMEA, and a 31.8% growth in pipeline projects. Based on our existing client base, the current trends we see are projected to increase as we go into 2018.
So, what’s driving this growth? One key factor is a market flush with capital. Global stock markets are at or near all-time highs, supporting confidence among corporate executives and providing additional currency in the form of robust equity valuations for those hunting for deals to fuel future growth.
Furthermore, the private equity market this year has raised the most capital since the financial crisis. Firms are under pressure to deploy a record level of “dry powder”, or else face returning it to investors. This is increasingly pitting PE firms against strategic acquirers in a competition for attractive assets, underpinning buyout activity.
Technological disruption is another key driver of M&A, as companies turn to deal making to achieve the innovation necessary to gain an edge on competitors in rapidly changing business landscapes.
The marketplace, however, is not without its challenges. Targets are commanding high valuations, and quality assets are becoming harder to find. Increased regulatory scrutiny has also hindered larger deals, and could have a chilling effect on the pursuit of transformative transactions.
Moving toward the end of 2017 and entering the new year, confidence in the market is set to remain strong. We continue to see an upward trend in the number of Merrill projects and deal activity in the UK, even as the Brexit story continues to play out. While both geopolitical and financial risks abound, the financial backdrop and strategic rationales remain supportive for companies to continue pursuing M&A.