North American M&A in 2018 is living up to expectations for robust activity, with first-half deal value on track to surpass the highs of 2015.

As of 30 June, there had been USD 849.05bn worth of deals in the region, putting 2018 on course to beat 2015’s record full year value of USD 1,565.29bn.

While dealmakers question how long the cycle will last, corporate bidders’ increasing firepower, especially after the Trump administration’s tax reform, appetite for riskier combinations and desire to acquire technology to stay ahead of peers are driving rampant activity.

This pursuit of technology is reshaping the traditional M&A landscape. According to Rick Climan of Hogan Lovells, blue chip acquirers in mainstay industries are seeking to enter new verticals, driven by the need to acquire technology to enhance their digital footprint. He cited the example of e-commerce, which has seen a slew of traditional retailers chase deals for technology companies.

In one notable example in May, Bentonville, Arkansas-headquartered Walmart [NYSE:WMT] agreed to acquire a majority stake in India’s Flipkart, an e-retailer, for USD 16bn.

“Players … outside the technology sector, everybody from Walmart to car companies to pharmaceuticals and others, are getting more aggressive,” said Robert Townsend of Morrison Foerster.

Meanwhile, large corporations have been emboldened by the Trump administration’s tax reform and the regulatory mood in Washington to attempt large combinations fraught with regulatory risk.

In the biggest deal of the first half, Bloomfield, Connecticut-based health insurer Cigna [NYSE:CI] announced a USD 67.6bn deal to buy St Louis-based pharmacy benefit management services provider Express Scripts [Nasdaq:ESRX].

The next two largest deals were announced at the start of a frenzied week in May, with Sprint [NYSE:S] and T-Mobile [NYSE:TMUS] announcing a long-awaited USD 50bn tie-up and Marathon Petroleum [NYSE:MPC] agreeing to acquire Andeavor [NYSE:ANDV] in a USD 30.2bn deal to create the top US refiner.

Townsend and other media sector advisors expect vertical integration and convergence through deals to ripple across the TMT space following the USD 85.4bn merger between AT&T [NYSE: T] and Time Warner, which closed 14 June, largely seen as a bellwether transaction.

As reported in sister publications PaRR and Dealreporter, the US Department of Justice’s lawsuit against the Time Warner/AT&T merger was the country’s first litigated vertical merger in several decades. The lack of recent vertical merger law guidance contributed significantly to the court’s decision to allow the merger, which has regulators considering whether to revise the vertical merger guidelines for the first time since 1984. Moving forward, upstream and downstream acquisitions in concentrated markets are expected to see heightened antitrust scrutiny, as reported.

In the middle market, bidders, pressured to deploy capital, are grappling with record high valuations and lofty expectations from sellers.

Many bidders are pricing in expectations for a downturn next year or the year after, Mergermarket recently reported, citing private equity executives.

Still, Hogan Lovells’ Climan pointed out that historically M&A activity levels have been known to hold up for a year or more after the onset of an economic downturn.

“At some point we are going to see secular decline in valuation parameters,” said Ted Smith, president of Union Square Advisors. “But our opinion is that’s likely to come in the form of a correction, not a crash, because we still see a lot of positives in the overall economic environment particularly here in the States.”

 

by Tom Cane and Thomas Zadvydas