A pause that refreshes: US companies normalize deal plans after an M&A flurry, remain watchful amid policy turbulence
This past summer in the United States, even before we surveyed executives for our 17th semiannual Capital Confidence Barometer, we had a sense that the deal markets were in a different place – a comedown from M&A’s multiyear, record-setting run in the mid-2010s. At the halfway point of 2017, US dealmaking was already at an ebb for the year, down 15% from the same period in 2016.
So we were not entirely surprised a couple of months later when our survey showed a significant falloff in US corporates’ intention to pursue deals – the Barometer metric we follow most closely. Over the next 12 months, 42% of US executives say they are planning deals, off considerably from the more than three-fourths who had such plans in our April 2017 Barometer.
What may seem perplexing about this result is that virtually every other dealmaking and corporate-confidence metric in our survey points toward positivity and stability, even buoyancy. Nearly two thirds of our US respondents see corporate earnings improving. They are bullish on the global economy, especially as Europe bounces back from the Eurozone crisis, and they regard the domestic US economy as either growing or stable; the same goes for global and domestic M&A markets. US executives say deal metrics such as credit availability and equity valuations are rock solid.
The change in deal intentions reflects a host of complex issues: a return to normalized M&A levels after the flurry of dealmaking from 2014 to 2016; corporates digesting and integrating the many deals they have already executed; a marked increase in alliances to acquire innovation, as opposed to deals; and of course, ongoing uncertainty in Washington around key issues like tax reform.
This combination of underlying confidence but checked M&A intentions feels like a turn toward a natural cycle. Simply put, a pullback was inevitable, and we are encouraged by the shape of this tactical pause: marked by deliberation, not an abundance of caution. Virtually all of the US companies in our survey engage in regular portfolio reviews – nearly half do so annually – indicating that companies are employing every tool at their disposal, from divestment to cross-sector partnerships, to stay competitive in these relentlessly disruptive markets. Moreover, for the largest companies, M&A remains front and center: three-fourths of companies with revenue of US$5 billion or more are planning deals.
We will know better over the next few months if the US continues to be an M&A trend leader for the rest of the world, as often happens, and whether this potential pause was actually the start of a secular trend. For now, clients persist in their need to find growth, keep evolving, maintain market share and satisfy shareholders – all of which outweigh political and market uncertainty and will continue to drive corporate activity in the months to come.
EY Americas Vice Chair
Transaction Advisory Services
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Download US highlights (PDF) Press release: Execs see stable deal market; M&A intentions return to normalized level after flurry of US deal activity