Panel, Conference Presentation
The M&A Outlook
Milken InstituteJason Kelly, John Danhakl, Steve Krouskos, Jennifer Nason, Robin Rankin, Paul Stefanick, John Donhocle, Robin Zasio, Steve Grove, David Freeman, Mr. Sokoloff, Donhawks, MARTHA MINOW
- A robust M&A environment is projected for 2016, driven by stagnant organic growth, digital disruption, and a trend where 75% of companies intend to go global, though a record-breaking year is not anticipated.
- Approximately 50% of companies plan to execute an acquisition within the next 12 months, surpassing the 40% long-term average, with the back half of the year expected to be particularly strong for strategic transactions.
- Outbound activity from China is forecast to account for a significant portion of the cross-border market, with China acting as a major player in both outbound and domestic deals.
- Non-U.S. activism campaigns are expected to rise by roughly 30% globally, with expansion into Europe, China, Japan, Korea, France, Switzerland, and Australia, while U.S. activist activity is predicted to hit a steady state.
- Approximately 70% of hostile transactions have occurred in the preceding period, with hostile activity expected to persist and increase globally due to globalization, despite relatively low success rates.
- Activist hedge funds, holding $130 billion in assets despite underperforming the broader market by over 20% in the last 12 months, are expected to continue their campaigns to secure media coverage and capital inflows.
- Financial sponsors are anticipated to deploy capital from $700 billion in dry powder, having monetized assets at a three-to-one rate, with private equity firms holding $675 billion of dry powder needing to transact if leveraged.
- Market multiples are projected to increase by approximately one-tenth of a time, while financing markets are expected to pick up potentially due to restrictions on financing protocols.
- An era of "M-A-N-A" (mergers, acquisitions, and alliances) is expected to emerge, with alliances serving as resource-sharing tools without significant capital investment, particularly among tech strategics facing panic over accelerating technology cycles.
- Disruption driven by technology is anticipated to accelerate deal-making, with non-technology companies investing in tech companies nearly tripling over the last five years and major tech firms like Facebook, Apple, Microsoft, and IBM deploying capital aggressively.
- Distressed activity in oil and gas, mining, and metals is expected to persist, though energy sector opportunities are limited compared to prior expectations as capital markets bailed out companies traded on $75 oil assumptions.
- M&A and restructuring in commodity-related industries are expected to resume once pricing stability is reached, with restructuring becoming broader than traditional insolvency.
- Activity in the pharmaceutical sector is expected to decrease due to restrictions on inversions, while consumer products, industrial products, and life sciences sectors will see continued focus on cost management, efficiency, and sector-specific deals.
- Regional banks in the U.S. are targeted for consolidation due to fragmentation and cost takeout opportunities, while tech strategics face a need for alliances and minority investments.
- Antitrust and CFIUS reviews are projected to become more frequent and stringent, potentially scuttling transactions and making outcomes difficult to predict, requiring careful calibration of divestitures.
- The U.S. election year is expected to have little impact on deal-making, though the year following elections tends to be economically challenging, and activist success patterns often show short-term stock gains followed by worse long-term performance over two to three years.
- The IPO market is expected to improve over the coming months, with companies generating positive cash flow being the first to exit, though only a small percentage of intended IPOs will materialize as 90% do not proceed.
- A "dead zone" for buying activity is anticipated in slower-growth businesses, while traditional going-private transactions are expected to remain rare due to evolved corporate governance.
- The Capital Conference Barometer is expected to maintain high accuracy in predicting M&A market conditions over the following 12 months.
- Activism is expected to evolve structurally in non-U.S. markets to focus on governance and stakeholder balancing, while long-only investors may become more vocal, and board decisions may be influenced by potential interventions.
- Companies are increasingly expected to act as their own activists by anticipating external views to maximize value, with long-term activism expected to remain a permanent feature of the U.S. marketplace.