EY: Digital transformation drives M&A in 2018

Digital transformation will remain a core driver of M&A in 2018 while the year’s M&A outlook looks robust with global corporates seeing deals as a significant opportunity for growth, said EY recently.

Despite the positive forecast, the slowdown in mega deals in 2017 will likely continue as regulatory scrutiny on big merger increases, according to EY, which reports the value of global deal dropped 7% to US$3.2 trillion in 2017, compared to a 6% increase in 2016.

“The drive toward a digital future will likely see more innovative start-ups and nimble tech-enabled businesses targeted, with global corporates seeking to complement their own organic strategies,” said Steve Krouskos, EY Global Vice Chair – Transaction Advisory Services.

He added that tech-smart deals will help companies future-proof their operations and address continuously changing business models.

“We should see a strong continuation of deals in the range of US$1 billion to US$5 billion as companies buy and sell to transform their portfolios,” Krouskos noted.

PE buyers team with corporates on mega deals

In addition, the US$340 billion value of private equity-driven M&A in 2017 marked a ten-year high and further activity can be expected in 2018, with US$628b4 of available cash earmarked for buyouts, said EY.

While posing a competitive threat to corporate deal-makers, an emerging trend in 2017 was private equity (PE) buyers joining forces with companies on bigger deals.

“We have become accustomed to PE and corporates competing for the same assets,” said Krouskos “The emerging trend of collaboration on M&A should result in more deal activity overall as these new kinds of alliances come to the deal table.”

The uptick in European PE activity seen in 2017 should continue as economic confidence in the region strengthens, he added.

China outbound deals important

Cross-border deal-making within Europe and beyond will also accelerate in 2018, with the majority of those companies planning a deal looking outside their own national borders, according to EY.

China outbound deal flows in particular are expected to be an important part of global M&A.

Outbound M&A value (US$114 billion) and volume (608 deals) from China, though lower than 2016 record levels, outstripped any year previous to that, EY observed.

Domestic consolidation accelerated in 2017 and is expected to grow further in 2018, while more inbound activity by non-Chinese companies can also be expected, especially in financial services and consumer products.

“Globally integrated business models and supply chains that stretch across many borders are a fact of life,” said Krouskos. “There is no way or reason to unravel that and deal-making in 2018 will continue to reflect the interconnected business world, despite any protectionist sentiment.”

Geopolitical and regulatory risks

According to EY’s Global Capital Confidence Barometer—a survey report published in October 2017— executives cite further increases in regulatory scrutiny among the top risks that could undermine deal activity in 2018. Almost half (43%) of corporates cite geopolitical uncertainty as the greatest risk to their business, said EY.

“Companies are proactively finding solutions to regulatory challenges to help ensure deals are done,” Krouskos noted. “They know that standing still from an M&A perspective is no longer an option.”

Value creation is no longer just about the bottom line

With a wide variety of stakeholders in today’s business environment, the demand for value creation beyond just the bottom line is rising, EY said.

As such, 45% of executives surveyed say they need to communicate a broader narrative that clearly articulates the rationale for deals to engage a wider stakeholder set – including shareholders, regulators, employees and local communities, EY added.

 “The ‘purpose’ of a deal now needs to speak beyond typical synergies and cost savings to address the concept of inclusive growth,” said Krouskos. “Articulating this narrative in a compelling way to ensure all stakeholders are onside will become increasingly key to unlocking future M&A opportunities.”