First Quarter M&A Deal Flow Stalls, But Announced Transactions Point to Uptick for the Remainder of 2018
May 4, 2018
SEATTLE, NEW YORK, SAN FRANCISCO, LONDON – May 3, 2018 – PitchBook, the premier data provider for the private and public equity markets, today released its 1Q 2018 Global M&A Report, which found completed deal counts slid in the first quarter, but activity is expected to regain momentum throughout 2018 across North American and Europe. Knock-on effects of corporate tax cuts in the US, a stable European economy and a heap of announced deals in 1Q 2018 point to stronger deal flow for the remainder of the year. However, an acceleration of carve outs and divestitures in the first quarter signals that firms are looking to slim down after the recent buying binge. Additionally, although healthcare continued to command a higher proportion of M&A, deal flow declined in the first quarter as dealmakers raise questions about the new competitive landscape following Amazon’s market entry.
“While completed deal flow decreased in the first quarter, we expect activity to pick up in the remainder of 2018 due to the flurry of announced deals that have yet to close,” said Dylan Cox, senior analyst at PitchBook. “The knock-on effects of corporate tax cuts in the US, as well as a relatively healthy European economy should enable dealmakers to be aggressive on both sides of the Atlantic. Another contributor to strong deal flow will be the ample reserves of dry powder in private equity funds.”
Global M&A Activity
M&A activity got off to a slow start in the first quarter with roughly 4,867 deals completed, totaling $616.7 billion across North America and Europe —18% and 25% year-over-year decreases, respectively. Deal flow is expected to experience an uptick in 2018 aided by favorable economic factors and announced deals that have yet to close – an additional 973 deals totaling an estimated $451.3 billion were announced in 1Q 2018 or 4Q 2017.
The IT sector accounted for 19.5% of M&A activity in the first quarter, up from 17.3% last year. The sector continues to command a greater share of both deal flow and capital invested as strategics and financial acquirers adapt to fast-changing technology.
Over the last decade, cross-border M&A deals have increased, especially in Europe, in part due to the prevalence US-based PE firms with European operations and Canadian LPs executing direct investments. In 1Q 2018, 13.6% of European M&A transactions involved a non-European buyer—up from the decade-low of 9.0% in 2009.
While healthcare has accounted for a higher proportion of M&A in recent years, deal activity is pacing for a third consecutive year of declines. In the first quarter, just 368 healthcare deals were completed totaling $53.5 billion, accounting for 9.4% of transactions. Median deal size also decreased from $54.6 million in 2017 to $37.0 million so far in 2018.
The slowdown in healthcare M&A started in 2016 following questions about the future of the Affordable Care Act. Now, the focus has shifted toward the new competitive landscape with the Amazon, Berkshire Hathaway, and JP Morgan Chase partnership.
Despite the uncertainty, several major healthcare acquisitions were completed in the first quarter, including Air Medical Group Holdings acquisition of American Medical Response for $2.4 billion and Concentra’s acquisition of U.S. HealthWorks for $753 million.
Elevated pricing, high levels of debt usage and an uptick in the number of carve outs and divestitures, have led to speculation that the M&A cycle is nearing its end. In the first quarter, there were 618 completed M&A divestitures totaling $92 billion, with another 463 of announced transactions totaling $149.0 billion. This acceleration shows companies are looking to slim down and refocus on core operations after the recent buying binge.
The sizes of recent carveouts and divestitures have been particularly noteworthy. The average divestiture completed in 1Q 2018 was $308.6 million, compared to an average of $257.4 million over the last decade. For announced deals that have yet to close, the average jumps to $583 million.
The top announced carve outs and divestitures driving up median deal size in the first quarter include, E.ON’s acquisition of Innogy for $53 billion, Blackstone’s announced $17.0 billion buyout of Thomson Reuters’ financial and risk business and Unilever’s $13.9 billion divestiture of its spread business.
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