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US M&A remains resilient despite market fears

Mergers and acquisitions in the US remain resilient, despite market concerns, per Ernst & Young’s latest Capital Confidence Barometer.

The US mergers and acquisitions pipeline is focused on resiliency in the face of a potential recession, according to Ernst & Young’s most recent Capital Confidence Barometer, published in mid-October.

Some 96% of the nearly 600 US C-suite executives surveyed anticipate domestic economic growth, and 83% expect the US M&A market to improve in the next year. Despite geopolitical and economic uncertainty, the outlook remains rosy.

But there’s another side to the story: deal intentions slipped below the 50% mark for the first time in two years, with just 46% of US respondents saying they intend to actively pursue M&A in the next 12 months. Yet, given market conditions—56% of US executives deem regulatory impacts as their greatest external business threat—that’s still “pretty incredible,” according to Bill Casey, EY Americas Vice Chair of Transaction Advisory Services.

“We’re getting to be in choppy waters right now. A lot of companies are really trying to focus on resiliency. They’re starting to reshape their businesses,” Casey told PitchBook. “And what we’re seeing, and what I expect to see, is a big uptick in divestitures, where companies are going to use the proceeds from their divestitures to double down.”

That means large corporations may begin selling off non-core operations at a faster rate, opting to reinvest that money into core businesses—and innovation.

Private equity, with its ample funds waiting to be deployed, could drive the competition for these “big, juicy, chunky” spinoff deals. Indeed, nearly two-thirds of respondents expect an increase in hostile and competitive bidding, indicating a robust market flush with cash.

“What we’re experiencing with our clients right now is that there’s certainly an uptick in the activity of PE, and I think that’s going to accelerate going into 2020. I think it’s going to be a real active year,” Casey said.

Bain Capital‘s buyout of Toshiba’s memory chip business in 2018 for 2 trillion yen (about $18 billion at the time) presents an outsized example of private equity’s M&A presence. And the firm could already be exiting sometime this year—it reportedly began weighing an initial public offering for the unit in February.

Bumps in the road

The geopolitical situation cannot be ignored, as trade tensions between the US and China continue to affect the M&A pipeline. About 48% of US executives said they actively plan to respond to ongoing geopolitical, trade or tariff uncertainty, according to EY’s survey. Those responses could range from supply-chain configuration and reducing outsourcing to passing on higher production costs to customers.

“From what we’ve seen talking to our clients, this is a bump in the road,” Casey said. “The sentiment is probably this is not going to be something that’s going to be solved in the next three to six months.”

As for the impending US presidential election year? Despite candidates challenging the financial world with an unprecedented vigor, Casey isn’t worried about a deal dip.

“I’m certainly not seeing anyone factoring [the election] into their deal count list or M&A strategy … I don’t think anyone’s talking about that.”

Featured image via phototechno/iStock/Getty Images Plus

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    Written by Eliza Haverstock
    Eliza Haverstock was a PitchBook writer covering venture capital, startups, and private equity.

    A graduate of the University of Virginia where she majored in history and economics, she’s also a native of the Washington, DC, area. Previously, Eliza worked as a news editor for her college paper, The Cavalier Daily, and interned as an industrials reporter for Bloomberg in New York.
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