Insights

Why M&A Is Booming and What It Means for the Future
POSTED 3.21.19 M&A

We’re living in a Golden Age of Mergers and Acquisitions. The numbers are in and… there were $2.2 trillion in M&A transactions in 2018 in the United States alone, compared to just over $2 trillion in 2017. That marks the fourth year where the level has breached $2 trillion.

Some other signs of this very healthy M&A environment:

  • Median deal size is increasing steadily, to $60 million in 2018. That’s up 22.4% from the previous year.
  • In 2018, there were six deals above $50 billion. Buyers are confident to spend more and more money.

Although there was a slight dip in 2018 in the number of deals done (11,208 compared to 12,647 in 2017), I expect this trend of increasing M&A activity to continue. Here’s why:

  • There’s a lot of “dry powder” out in the marketplace. Investors are looking for places to put their money to work. PE firms, which also have more capital on hand from recent tax reform, are obliging.
  • Tax reform also put more cash in the hands of corporate acquirers.
  • A looser regulatory environment.
  • A strong stock market.
  • Cheap financing.
  • Buyers are on the hunt for acquisitions, and many companies are ready to be bought. Acquisition is their exit plan. Most do not want to go the IPO route. In 2018, there were 11,208 acquisitions in the U.S., compared to just 190 IPOs.
  • Corporations and PE firms are increasingly divesting units or portfolio companies.

The consensus is that going forward in 2019 and beyond, we’re going to see more deals, and bigger deals. This is despite ongoing global economic uncertainty, rising interest rates, anti-trust issues, the impact of tariffs, capital market volatility, and some concern that the economic conditions that have driven the rising trend could turn.

A recent survey of 1,000 PE firms and M&A corporate executives conducted by Deloitte bears this out.

  • 76% of M&A executives say they expect to close more deals in 2019.
  • 87% of executives at PE firms feel the same way.
  • 21% anticipate a drop or leveling off of M&A activity (that’s compared to 30% last year).
  • 70% of all those surveyed say they expect bigger deals in the coming year.
  • 51% anticipate more deals in the $500 million to $10 billion range.

The main reason for this rising trend: the PE firms at the forefront have larger funds, and they’re not sitting on that money. They’re leading the charge. In fact, in that Deloitte survey, an impressive 94% of PE executives at funds over $5 billion expect more deals in 2019.

This is confirmed when you look at what’s happened over the last few years. According to PitchBook’s annual report, PE firms accounted for 34.2% of M&A deals in 2018; that share of the market has risen steadily since it was at 25.4% in 2015.

(Not to be discounted as an element of this trend, is the growing corporate M&A strategy of acquiring companies to expand their customer base and/or diversify their offerings. Corporations also have more cash on hand due to the recent tax reform. They view M&A as the best way to grow.)

Another trend we’ve seen, especially among savvy PE firms, is the increasing use of Representations and Warranty (R&W) insurance to cover deals.

According to a study from Harvard Law School, the number of R&W policies written has grown from a few hundred just five years ago to more than 1,500 in 2017. Their report also notes that more than 20 insurance companies are now writing these policies.

Essentially, this specialized coverage puts the risk of breach of Representations in the hands of a third party: the insurer. That gives peace of mind to both Buyer and Seller and speeds up negotiations because a main sticking point, indemnity, is off the table.

The Seller gets more cash at closing because less money is held in escrow (and won’t be at risk if there is a breach). The Buyer won’t have to pursue the Seller in case of a breach; the insurance company will pay claims promptly. And with 19.4% of deals subject to a claim in 2018, at least at insurer AIG, it’s clear why this protection is important.

With the complexity of today’s deals, it’s easy to miss something in the due diligence process, and R&W insurance insulates you from that risk. And, it’s much more affordable than you might think.

If you’re part of this rising trend in M&A activity, you should consider making R&W insurance part of your next deal.

I’d be happy to discuss with you what these policies cover, how you apply, and the estimated cost. I can easily put together a quote with just a few pieces of information from you.

I can be reached at 415-806-2356 or by email: pstroth@rubiconins.com