The just released Intralinks Deal Flow Predictor (DFP) for Q2 2018 forecasts that the number of worldwide announced M&A deals in 1H 2018 is expected to increase by up to 10% YOY compared to 1H 2017.
Brian Hwang, director of strategic M&A and alliance at Intralinks, broke down recent DFP findings by responding to questions from WooTrader.
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WooTrader: Despite an optimistic worldwide outlook, the most recent DFP suggests announced M&A deals in North America could decline by 5% in 1H 2018. Factors cited include the protectionist policies of the Trump administration. What impact is this likely to have on M&A compared to other factors?Brian Hwang: We don’t really see protectionist policies out of the U.S. grow to anything material, outside of populist election rhetoric. Tax reform on the other hand is reality and inflationary pressures are already a concern for economists.
What will companies invest their tax savings in? Pay down debt? Wage increases? Stock repurchase programs? Depending on how this money cycles through the economy – and how consumers put their tax savings to work, will be a prime driver of economic activity and corporate growth strategies for 2018.
How concerned are dealmakers in North America with Justice Department pushback as part of an overall anti-M&A stance by politicians, especially in Washington?
We believe that’s not a tier-1 issue for dealmakers – these types of challenges and concessions happen all the time. The larger concern are valuation gaps and exit multiples that may seem too far to bridge given where the equity markets are at.
Cheap debt is providing some air cover but a continued rise in equity prices, along with stock buy-back programs could really make deal flow stagger.
What accounts for the anticipated (outsized) 14% growth in announced M&A deals in the Asia-Pacific region for the first half of 2018?
It’s hard to pinpoint, but we’ve seen exceptional activity across most nations outside of Japan. China and India continue to be leaders in deal making with business-friendly policies that are fueling growth.
There are always underlying risks including China’s debt to GDP ratio and North Korea, but we’re still not seeing that impact investment and growth appetite in the region.
When it comes to M&A, Latin America seems (somewhat perennially) unable to "get off the ground." What factors could account for low growth in that region?
You still have Brazil, the region’s largest economy sorting through the various scandals over the past years, and Venezuela is certainly adding regional stress.
Until regional political issues get sorted out and natural resources get stabilized on all fronts, including outflow and pricing, we expect the region to remain volatile with downward pressure.
What sectors do you expect to show the strongest growth moving forward in 2018?
Consumer retail & industrials are getting a big assist from the rise of discretionary income, tax cuts and continued talk of infrastructure investments.
Health care is still experiencing uncertainty under the ACA and risking insurance costs, so we expect that sector to see meaningful (M&A) activity to scale services.
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With the overall worldwide outlook for M&A optimistic, what factors should investors and others watch for that could tip the balance – positively or negatively?
Globally, there’s geopolitical issues – the PRC recently announced a proposal to re-evaluate presidential term limits, we still have North Korea to deal with, Russian interference with global election cycles and continued pressure on oil prices – globally, there’s plenty of overhang that can easily tilt the markets, but this isn’t anything new.
Stateside, we saw how the market reacted to the most recent tax cuts and the rising concerns of inflationary pressures – also household debt reached an all-time high according to the New York Fed, at $13.15 trillion. Inability to pay down debt – mortgage debt factors in close to $9 trillion – coupled with inflation and rising yields could place material stress on the markets and consumer spending, thus impacting M&A activity.