Businesses are looking at bigger merger & acquisition (M&A) targets in 2018; both in the number and size of those deals, according to Deloitte’s latest M&A report. Deloitte surveyed more than 1,000 executives at corporations and private equity firms about their M&A activity in the next 12 months. The number driver for those deals is to acquire technology, according to Deloitte.
Twenty percent of corporate respondents said acquiring technology assets is the number one reason for their deals, up from six percent in spring 2016. This is followed by expanding their customer base in existing markets and adding product offerings or diversifying services.
A new question in this year’s survey finds that 12 percent of respondents cite digital strategy as the driver for M&A deals this year, ranked number four in deal drivers. Acquiring technology or a digital strategy, together, accounted for about one-third of all potential deals.
The report, The State of the Deal – M&A Trends 2018, reveals that executives expect deal activity to pick-up this year. Sixty-eight percent of executives at US-headquartered corporations and 76 percent of leaders at domestic-based private equity firms said the number of deals will increase over the next 12 months. Sixty-three percent said deal size will increase while 34 percent said it will stay the same compared to 2017.
“Both the expectation of higher deal volumes and larger deals is in sharp contrast to the trends seen over the past few months of 2017,” said Deloitte.
What’s having a big impact on these deals are tools and technology, said Deloitte. Sixty-three percent of respondents are using new M&A technology tools to help with reporting and integration, which helps to reduce conflict, costs and time.
One possible reason for the confidence is a greater return on investment (ROI) on their deals. Only 12 percent of executives said the majority of their M&A deals are not generating the expected ROI, which is down from about 40 percent in 2016. In comparison, only six percent of private equity respondents said their deals are not meeting expectations, compared to 54 percent in spring 2016.
The most confident execs and investors, who believe they will engage in bigger deals, are those with revenues and investments of more than $1 billion. Thirty-five percent of corporations with revenues of $1 billion+ expect to increase the pace of their acquisitions, compared to 22 percent of smaller companies. At private equity firms, investing more than $1 billion, 29 percent expect activity to pick up over the next year, compared to 12 percent of smaller investment companies.
For the second year in a row, two-thirds of corporate execs said cash reserves are up. The primary use for the cash reserves is for M&A deals, they said.
However, the survey finds fewer US-based companies are interested in global deals. Interest in deals in five countries - China, Japan, Brazil, Italy and Spain, alone, are down 26 percent compared to one year ago.
Pointing to some mixed signals in the industry, companies are still looking overseas for potential acquisitions. In fact, more than 90 percent of respondents told Deloitte they’ll continue to engage in deals across borders. But the areas of geographic interest is shifting and they will be more selective looking ahead.
Corporate respondents said they were more selective in their deals over the past 12 months. Case in point: The number of companies that closed six or more deals dropped to 52 percent from 60 percent a year ago, while the number of companies that closed five or fewer deals increased slightly to 45 percent from 38 percent one year ago. They also closed fewer deals in the $500-million to $1-billion and more than $1-billion range.
In deals between semiconductor companies, alone, IC Insights recently reported the value of the M&As dropped to $27.7 billion, compared to $99.8 billion in 2016 and record-high of $107.3 billion in 2015.
Other trends include more divestitures, driven by changes in finances and strategy, as well as industry and sector convergence with a big push toward vertical integration.
The biggest obstacle over the next 12 months cited by respondents is global economic uncertainty. However, only 20 percent cite it as a concern, down from 26 percent in fall 2016. Other big obstacles cited include capital market volatility, deal valuations, interest rates, and potential delays in business-related legislation.