Cheap Financing, Abundant Dry Powder, and Disruptive Opportunities led to Flourishing M&A in 2018
By Arthur Mansourian
With companies giving warnings about future earnings (as the beneficial effect of changes to US tax laws wears off and interest rates are hiked) and a global slowdown on hand, we saw companies look to inorganic growth to keep investors happy in 2018. Executives started to recognize the convergence of technologies, including the Internet of Things, mobile capabilities, data analytics, and e-commerce. With so much abundant dry powder (Apple alone has $237.1 billion in cash), M&A activity flourished in 2018, with the value of M&A deals rising 11.5% reaching $3.53 trillion.
As a way to combat declining growth rates, scope deals, which are designed to create new market opportunities and enhance the capabilities of the acquiring, were particularly strong in 2018. Typically, the most common scope deal is when an acquirer looks to make an immediate impact on growth by acquiring a company with a fast-growing service or product. Also, acquirers look to take on a company due to its innovative capabilities, and entry into new markets that the target company can provide to help transform a slow growing or antiquated business. The key is that keeping investors happy can be done with organic business growth or through efficient and effective acquisitions.
An example of a disruptive deal from 2018 was the acquisition of Layer 6 AI by Toronto-Dominion Bank, which will provide an AI-powered system to anticipate a banking customer’s needs. This theme of non-tech companies looking to make technology acquisitions as an inorganic means of obtaining certain solutions or products was seen in a plethora of deals. Other examples are the $13 billion Altria paid for 35% of the vape company Juul, while also paying $1.8 billion for 45% stake in Cronos. The entrance of Altria into the vape and marijuana industries was unprecedented for an old tobacco company, and can prove to be the edge needed to make an impactful change.
The rapid evolution of technology in so many sectors provides continuous fuel for more M&A activity in 2019. Add to that the large cash stockpiles many major U.S. companies have, and this creates the perfect scenario for such companies to experiment with the acquisition of startups or early stage companies.
As has been seen over the past several years, retailers have been hurt hard by the new disruptive technologies that have changed businesses. In order to stop the bleeding, companies have closed stores and have begun to look for new ways to stay relevant. These actions have had a ripple effect throughout the entire value chain, and retailers are now focused on expanding capabilities that can lead to increased customer loyalty and sales volume. Looking to this year, we anticipate very strong M&A activity, as large companies look to swallow up small disruptive companies, especially in the cannabis, biotechnology, social media, and semiconductor industries.