The market is sending mixed signals regarding the appetite for M&A and IPOs as we enter 2019. Volatility has risen sharply in recent months, but last year closed on a high note, with global M&A value reaching the third-highest level on record at US$3.53 trillion. On the IPO front, several of the largest “unicorn” companies—including Uber, Airbnb, and Palantir Technologies—are reportedly gearing up to go public this year. Yet to start the year, the US government shutdown froze the IPO market, putting a damper on the enthusiasm built up in late 2018.
To understand what dealmakers expect from the M&A and IPO markets in the coming year, Mergermarket on behalf of Toppan Merrill spoke with six experts.
Toppan Merrill question: In your sector of focus, what do you expect to be the main drivers of M&A dealmaking over the year ahead? Is the current economic and business environment conducive to transaction activity in these sectors? Leading industry experts weigh in...
Matt Veneri, FIG Partners says: Our firm deals exclusively with financial services companies, and primarily with banks. Within that universe, we cover many of the large, super-regional banks, all the way down to the small community banks. And we're one of the leading M&A advisors in the financial services space, because we tend to work with the community and regional institutions.
To put this question into context, I’ll first give you a sense of how activity has shaped up over the course of 2018 and even 2017 and 2016. There was an inflection point specifically in the banking space back with the election in late 2016. The financial services sector was one of the main beneficiaries as far as a stock valuation increase over the course of the next few months. That led to a very healthy M&A marketplace in 2017 that continued into 2018, and pricing has improved in each of those years since the 2016 election. So if you go back to the Great Recession in 2008 and look at where we are today, pricing and activity are at their strongest over that 10-year timeframe. We've had a bit of volatility in the market over the last couple of months, but we still foresee activity continuing. Typically 3-5% of banks in any given year participate in some type of consolidation, and we're at the upper end of that at about 5% last year and this year. We anticipate that next year we'll see it stay at that upper end.
Sophie Lamonde, Stikeman Elliott adds: My practice is focused on Canadian M&A and private equity, and I do a lot of cross-border work. So my responses will have a Canadian spin to them, but a cross-border component as well. In Canada, M&A practitioners tend to be generalists to some extent, in that we tend to work across various industries. In 2018, the volume of M&A in Canada was quite high almost continuously throughout the year, and it's included a lot of cross-border activity with the US and Europe. For instance, we were kept busy for a big portion of the year with Airbus’s acquisition of a controlling stake in what was the C Series aircraft program, what is now the A220 aircraft program. We see a good deal of cross-border activity heading in both directions.
I think that 2019 will prove to be similar to 2018 in terms of M&A deals. I would say the Canadian markets generally are an attractive destination for both domestic and international investments – we've seen steady economic growth in the country as well as a stable political environment. Obviously, we're not immune to what's been going on globally, but I think Canada is still a place where you can find a lot of good and, frankly, reasonably priced deals. Looking ahead to 2019, there are already a lot of good assets that have either just gone to market or are going through auction processes that will extend into the coming months.
Richard Fridman, Davies weighs in: My practice is, in large part, focused on the mining sector, and it's certainly tumultuous times for the sector as a whole. The precious metals sector in particular has come under a high degree of pressure. Commodity prices have flattened and there’s a paucity of new projects, especially in more stable jurisdictions. A lot of the highly prospective projects are located in higher risk countries that are less developed and less predictable.
Given the lack of obvious opportunities, we may start to see more transactions along the lines of the merger between Barrick Gold and Randgold. The combination of Barrick’s portfolio of high-quality assets in more predictable and stable jurisdictions, with Randgold’s significant low-cost operations in higher risk jurisdictions, resulted in a global gold miner with a balanced portfolio of assets in stable, low-risk jurisdictions such as North and South America, and low-cost, high-quality assets in African jurisdictions with a higher risk profile and significant upside opportunity. As new high-quality projects have become more difficult to identify, I expect to see more business combinations of this type, as companies seek greater scale and to diversify their asset base. While some experts had expected further consolidation to have started already, I think it is only a matter of time before M&A activity in the mining industry picks up.
Tatjana Paterno, Bass Berry & Sims says: Healthcare is one of my focus areas, and over the last year, we saw a lot of activity in the physician practice management space – businesses that help streamline physician practices’ processes and help alleviate administrative burden. Private equity has been especially active in this area. We’ve also seen a lot of activity in post-operative care and in behavioral and mental health, as well as diagnostic services. I think those areas will continue to be attractive to buyers into 2019.
Another interesting phenomenon is healthcare companies thinking outside the box when it comes to acquisitions. For example, in December, a company called Tivity Health, which is in the fitness and health improvement space, announced the acquisition of NutriSystem, which is a weight-management company. Tivity decided to reach outside their direct line of business for another vertical to help provide a better value to their customers. The combined company will be unique in offering, at scale, an integrated portfolio of fitness, nutrition and social engagement solutions to support overall health and wellness.
In terms of M&A drivers, for one thing there is a lot of dry powder at PE firms, and there are many strategic acquirers with abundant funds on their balance sheets. The availability of quality targets is limited, so valuations are high and I think that will continue into next year.
Geoffrey Baldwin, GCA adds: Typically, the economy cycles every five to six years and you have a recession and everything gets reset. That basically ends up reloading the M&A and IPO markets. The issue we have right now is that we've had a 10-year economic run where there hasn’t been a reset. As a result, assets have become really expensive – not just the high-flying, fast-growing technology companies but almost all companies. I've been doing this for 33 years and I've lived through lots of upturns and downturns, and valuations at the moment seem to be essentially double what they used to be. Even a basic industrial company growing 5% a year with 10% operating margins – historically, a company like that might be worth 8x, and those companies are all trading at 16x now.
If valuations remain expensive, M&A activity will start to be limited to must-have deals. That means deals in industry sectors that people view as absolutely critical to their roadmap going forward. Usually, a lot of those are technology deals, such as artificial intelligence companies. But some of the more vanilla deals, for companies that don't have particularly impressive growth or profitability, are hitting the wall right now. When acquirers do the math, they just look too expensive for what they're getting.
All that being said, the M&A business has been very good this year. And just looking at my own firm, which focuses on M&A and capital markets advisory in the technology sector and other growth sectors of the global economy, we've got a substantial backlog going into next year. So ultimately, I think it will be another good year. The US economy is performing better than at almost any time in my professional career, and I think despite the issues that do exist, the underlying fundamentals are very robust, and to me that means we’ll see a lot of M&A in 2019.