SEATTLE – July 27, 2017 – Financial sponsors and strategic acquirers adopted a conservative approach in the first half of 2017 as investors dealt with unstable market conditions caused by ongoing political and economic issues, as found in PitchBook’s Q2 2017 Global M&A Report. Both North America and Europe faced unique challenges that contributed to the overall M&A slowdown. In the first half of 2017, U.S. investors were confronted with rising EV/EBITDA multiples and skyrocketing deal sizes, meanwhile, European investors practiced a ‘wait-and-see’ approach as Brexit negotiations continue to unfold. The different market conditions fostered cross-border deals, with an emphasis on the IT sector, which continues to be of strong interest to buyers.
“After a few years of strong M&A activity, 2017 has been significantly disrupted by external factors which have impacted dealmaking in all markets,” said Dylan Cox, analyst at PitchBook. “With EV/EBITDA multiples remaining high and transactions growing larger, we’ve seen an uptick in cross-border dealmaking as well as more involvement from PE firms, indicating investors are in the process of reevaluating their strategies. M&A will likely continue to be impacted throughout the rest of the year, until investors gain more clarity surrounding their economic futures.”
Market Uncertainties Overpower M&A Activity
Ongoing political and economic uncertainty caused an M&A slowdown in both North America and Europe in the first half of 2017, pacing for more than a 20% decline in both volume and value of M&A transactions year-over-year. Just $910.6 billion in deal value was completed across 8,982 transactions so far in 2017, compared to $1.2 trillion across 12,289 deals over the same period last year. Although slow moving, the IT sector continues to be a hotbed for investor activity around the globe, making up 18% and 19% of total M&A activity for Europe and North America, respectively.
Despite recent stock market gains, European M&A activity slowed in the second quarter with $121.3 billion deployed across 1,555 transactions, down from $149.4 billion invested in 2,136 deals in Q1. Ongoing uncertainty tied to Brexit stalled M&A activity, which caused a corresponding drop in EV/EBITDA multiples in the region. Multiples fell to just 8.1x in the first half of 2017, the lowest figure since 2013.
Investors and corporate sponsors in North America were also slow-moving, but unlike Europe, M&A was weakened due to the expensive environment. Median EV/EBITDA multiples jumped from 9.7x in 1Q to 10.4x in 2Q 2017 as U.S. companies remain in high demand. While overall M&A deal flow is down in the U.S., 2017 is pacing to see the third highest deal value since 2010 with median M&A deal size jumping to $45 million in the first half of the year, up from $30.9 million in the entirety of 2016.
Increasing Ties Overseas Fosters Cross-Border Deals
Though overall M&A activity in North America and Europe has slowed in the first part of the year, the rate of cross-border deals has steadily increased year-over-year. Nearly 10% of European deal flow involved a North American acquirer – a trend we’ve seen gradually climb since 2010 when 7.65% of European deals involved North American sponsors. A key driver behind this trend is the broadening reach of North American PE firms, many of whom now have well-established offices in Europe and elsewhere around the globe. Additionally, the record high EV/EBITDA multiples in the U.S. are forcing investors overseas, where the decline in European M&A activity has caused median valuation/EBITDA multiples to fall and ease pricing pressure.
PE Investors Help Drive M&A Activity
Because of market conditions, PE now makes up a larger portion of total M&A activity. Nearly 30% of acquisitions were PE-backed in Q2 2017, up from 24.7% in Q1 2016. With prices continuing to rise and economic conditions still uncertain, strategic acquirers have exercised patience as they wait for the right opportunity. Meanwhile, PE investors were forced to put their capital to work and have continued to raise funds at pre-recession levels. Both European and North American PE investors saw success on the fundraising trail in the first half of 2017, especially in the US, where 50% of capital raised was committed to mega-funds ($5 billion +) – the first time since 2007.
Additional findings in this report include:
- Spotlight: Cross-border investment
- M&A by sector and size
- Spotlight: IT
- Spotlight: B2C
- Private Equity
- Q2 2017 League Tables
Download the full report here.
Founded in 2007, PitchBook is a data provider that tracks every aspect of the private and public markets, specializing in venture capital, private equity and M&A. More than 10,000 professionals access PitchBook’s data through the company’s award-winning software products. PitchBook is a Morningstar company with offices in Seattle, New York and London.