Doing Deals in 2018: will the good times continue to roll?Follow @PwC
Do sky–high levels of global growth confidence reported at Davos last month, and record levels of capital available mean a vintage year for deals? Malcolm Lloyd, PwC Global Deals leader looks at the prospects.
Talk about starting a new year on a high: 2017 for the deals market, was one to remember.
The overall dynamic for the market last year was one of oversupply of capital and cheap financing: a fantastic year for divestments in terms of being able to realise and optimise gains, and across all deal-making activity there were some notable headline grabbers such as Amazon/Whole Foods.
Private Equity (PE) raised more capital than at any time since the financial crisis. The total amount of dry powder – available funding yet to be invested – was reported at over $960bn in Q3 of 2017, with estimates at the close of the year likely to hit all-time record highs again. Also, US corporates alone were projected to have over $1.9 trn of cash on their balance sheets at the end of 2017.
In brief, as we start 2018, there is no shortage of access to capital and financing. As my PwC economist colleagues put it, ‘let the good times roll’. Does it translate to business leaders’ confidence? This is the critical test for the deals environment in 2018.
57% of CEOs in this year’s PwC CEO Survey are optimistic about the prospect of the global economy improving in the year ahead - almost twice the level of last year (29%).
In many ways, the sky-high confidence in the global economy being reported mirrors the dynamic of the deals market. Throughout 2017, despite rising levels of geopolitical uncertainty, the level of deal activity has been maintained.
With such an amount of dry powder available, there is increasing pressure on PEs to put that money to work: with even more intense activity around finding opportunities.
For business leaders, M&A and divestments remain important strategies for growth. Particularly when you consider the more conservative levels of CEO confidence about businesses’ own growth prospects. 42% percent of CEOs said they are “very confident” in their own organisation’s growth prospects over the next 12 months, up from 38% last year.
42% of CEOs are considering M&A as part of their growth strategy in the year ahead, higher in Spain and China (48%), Australia (49%) and the US (69%). Technology (46%) and healthcare (44%) are amongst those sectors outpacing the global outlook. A quarter of CEOs in China (26%), and one in five of Australian and American CEOs are considering divestments, higher than the global average (16%).
Technology disruption continues to be a key driver. In fact, the speed of technological change remains a top ten threat to growth for 38% of CEOs, up from 29% last year. In the Banking & Capital markets (42%) and Insurance sectors (51%), concern is higher, as it is in China (60%).
Few companies are doing deals now without an eye on innovation, and tackling where their business is experiencing disruption driven by technology. There’s much higher levels of interest in testing the hypothesis of a deal’s value in terms of technological transformation - skills, products, services, business models.
January was the first anniversary of the Dow Jones reaching above the 20,000 milestone for the first time in its history. There’s no doubt that the context – of stock market highs and oversupply of capital – is pushing up valuations; the question is how long the high valuations can be sustained, and whether the promised value can be delivered. We expect to see much more application of data analytics to validate underlying assumptions in the deals ahead.
More traditional questions remain for business leaders too. Over-regulation and an increasing tax burden remain key threats to growth identified by CEOs. How they could impact the deals environment, and the value they are creating is a key question for 2018.
The threat of over-regulation remains the top concern for CEOs (42% extremely concerned), particularly in China (52% extremely concerned) and the US (55%). Emerging too is CEOs’ concern on activist investors. The levels in the US (53% very or somewhat concerned) and China (87% very or somewhat concerned) stand out vs the global average of 42% (somewhat or very concerned).
Despite all this, the positive sentiment around deal-making in 2017 continues into 2018. Our CEO survey underlines the message of the World Economic Forum in Davos this year –achieving growth in a fractured world.
This is not the traditional deals market as many would have known it - leveraging equity, multiple arbitrage plays. It’s all about value creation, increasing revenue, optimising costs and improving overall strategic positioning. Deals are increasingly premised on value creation plays. Moves in the markets and sectors highlighted here will be closely watched in 2018 as businesses and deal makers get out to make hay while the sun shines.
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