In the first half of 2017, nearly 9,000 M&A transactions in North America and Europe closed for an aggregate of $911 billion, putting this year on pace to see 20% declines for both value and volume.
Even if those figures are still historically strong, is the M&A cycle definitively slowing? In the 2Q 2017 M&A Report, PitchBook analysts delve into transaction metrics, deals by sector and size, breakouts by deal type and more to answer that question.
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Featured in the report:
- Analysis of cross-Atlantic M&A between North America and Europe, which has recorded an increased rate
- A look at multiple datasets of transaction metrics, as the median platform buyout size notably surged by 52% in 1H 2017
- Spotlights on M&A within the consumer and IT sectors
Although Robust Still, M&A Continues To Trend Down
- M&A activity slowed in the first half of 2017. In North America and Europe, $910.6 billion in deal value was completed across 8,982 transactions (both figures estimated) in 1H 2017—each on pace for more than 20% year-over-year decreases.
- Though overall M&A activity has been slower, the rate of cross-border deals has increased. 9.8% of European deal flow involved a North American acquirer in 1H 2017.
- Private equity now makes up a larger part of total M&A activity. Sponsor-backed acquisitions have grown steadily from 24.7% of all transactions in 1Q 2016 to 29.8% in 2Q 2017.
The pace of M&A activity, while strong on a historical basis, decreased significantly in the first half of the year. European and North American markets have shown distinctly different pricing trends, while sectors such as IT have grown in popularity in both regions. Beginning this quarter, we’ve included estimates on top of the usual deal flow data that our readers are accustomed to. Due to the nature of private market data, information often does not become available until well after a transaction takes place, so shifts tend to occur over time. With these new estimates, we aim to provide an even more comprehensive picture of the private markets. Please see the methodology page of this report for more details. We hope this report is useful in your practice. As always, feel free to send any questions or comments to [email protected]
Dylan E. Cox
The M&A cycle winds down
After two years of gargantuan M&A activity, the pace of consolidation slowed in the first half of the year, largely in response to perceptions of political and economic uncertainty. In North America and Europe, $910.6 billion in deal value was completed across 8,982 transactions in 1H 2017 (estimated). At this pace, 2017 on the whole would see a decrease exceeding 20% in both volume and value of M&A transactions.
European market slows, despite asset inflation
Activity fell sharply in Europe, which is unexpected, given the recent stock market gains and promising GDP growth figures out of the region. What’s more, the ECB insists it won’t stop its QE program anytime soon, which should only bolster asset prices and investor confidence further. However, many potential buyers are worried about what might happen when the music stops: when the ECB does finally raise rates, when Brexit negotiations turn sour, or when another member country decides to seriously consider leaving the EU. Each of these could have an adverse impact on regional trade and therefore gives many potential buyers cause for concern. The median EV/EBITDA multiple for M&A transactions in Europe fell to just 8.1x in 1H 2017, slightly below the 8.3x recorded for the entirety of last year and the lowest figure since 2013.
North America holds on
The M&A slowdown has been less pronounced in North America, which investors still view as relatively stable compared to other economic regions. The median EV/EBITDA multiple jumped from 9.7x in 1Q to 10.4x in 2Q, but has stayed at more-or-less 10 times earnings for the last 18 months. This expensive environment causes concern for many dealmakers. $627.7 billion in deal value was completed across 4,584 transactions in 1H 2017—on pace for 18.5% and 23.6% year-overyear decreases, respectively. On a historical basis, however, activity is still very strong. 2017 is on pace to see the third-most deal value of any year since 2010.
Transactions trend larger
The median M&A deal size has skyrocketed to $45.0 million in 1H 2017, up from $30.9 million for the entirety of last year. For the almost one-third of M&A transactions that are backed by PE sponsors, larger fundraises and easy access to leveraged loans have allowed—and in some cases necessitated—that target sizes balloon. The median size for platform buyouts in 1H 2017 was $159.9 million, a 52% increase from the $105.0 million recorded last year. Add-on buyouts have also grown in terms of enterprise value, likely to retain compatibility with their platform company counterparts. The median deal size for add-on transactions in 1H 2017 was $95.0 million, more than double the $40.0 million we saw in 2016.
2017 sees increase in dealmaking across the pond
Cross-Atlantic activity on the rise
Though overall M&A activity in North America and Europe has been slower in 1H 2017, the rate of cross-border deals has increased. 9.8% of European deal flow involved a North American acquirer in the first half of the year, a figure that has risen steadily from 7.65% in 2010. One cause of this increase is the broadening reach of North American PE firms, many of whom now have well-established offices in Europe and elsewhere around the globe. Similarly, though to a lesser extent, European investors are upping their antes across the Atlantic. 6.8% of North American deals now involve European investors, up from 5.3% in 2016.
Moreover, cross-Atlantic deals are on pace to set new records in terms of the value of those transactions. $138.3 billion in deal value was completed by European investors in North America in 2017 thus far, on pace to beat last year’s total by 94%. In Europe, North American investors completed $67.1 billion in transaction value in the first half, on pace for a 34% YoY increase.
Despite—or perhaps because of—the fears of protectionist policies and an ensuing slowdown in global trade, dealmakers aren’t suppressing their own international ambitions. Modern technology and workplace tools have only made cross-border collaboration easier for multinational companies. At the same time, consolidation within the asset management and PE industries means that more investors will have a global reach.
Proportionally, smaller transactions trend down in volume
M&A by sector & size
Technology acquisitions prominent, driven by PE interest
Technology-focused companies have become a more prominent part of the global economy and, subsequently, the M&A marketplace. IT deals accounted for 18.6% of all transactions through 1H 2017, up from 15.9% last year and the highest in our dataset. The growth is driven mostly by financial sponsors, who are attracted by a maturing industry with recurring revenue streams, but also strong prospects for growth in the next decade. PE firms accounted for 29.5% of all tech deals in 1H 2017, the highest of any year since at least 2010.
While tech deals make up a larger portion of activity, we’ve seen a smaller percentage of total deal value come from the IT sector. Just 11.6% of completed transaction value was attributed to IT companies in 1H 2017, compared to 20.8% last year. However, industry observants should not be fooled into thinking this trend is indicative of smaller tech deals coming to market. In fact, median deal size in the industry has grown in each of the last two quarters and now sits at $45 million. Instead, 2017 has been marked by the absence of mega-deals that we witnessed in 2016, including Dell’s $67 billion take-private of EMC, Avago’s $35.7 billion merger with Broadcom, and SoftBank’s £24.35 billion acquisition of ARM. We expect these larger transactions to pick up in the second half of the year as technology-focused mega-funds at firms such as SoftBank, Silver Lake and Vista Equity continue to deploy capital in this area.
Read the full article here by PitchBook.