Baker McKenzie issued a statement regarding the outlook for transactions, indicating that while uncertain in the short-term due to geopolitical factors, the market will be more optimistic in the years ahead.
The statement said that after a year of political uncertainty, “the forecast in association with Oxford Economics, predicts an uptick in transactional activity over the next four years, based on a gradual pickup in global economic growth in the years ahead, with gross domestic product (GDP) rising to 2.6% in 2017, and 2.8% in 2018”.
As threats to the stability of the global economy ease, and dealmakers regain confidence in the market, Baker McKenzie said that the apprehension should turn into appetite.
“The forecast is based on the anticipation that EU and UK officials will make progress in forging a new relationship in 2017, and that the new US administration adopts a pragmatic stance on international trade and immigration, and sets out plans for fiscal stimulus. Also assumed is that China continues to manage its transition to a mature economy and the Eurozone continues its economic recovery, as well as financial markets continuing to hit new highs and investor confidence rising,” the statement read.
Paul Rawlinson, Baker McKenzie’s global chair explained: “We are clearly still in volatile times but deal-making is there to be done. Strong corporate balance sheets, cheap finance, and moderate growth across markets and key sectors all point to an improving mergers and acquisitions (M&A) run-rate later in 2017, after a cautious first quarter, and a significant uptick in 2018.”
“Global M&A and initial public offering (IPO) activity slowed sharply in 2016 amid heightened economic and political uncertainty,” according to Baker McKenzie.
The statement added that volatility in the US stock market, growing concerns about China’s economic slowdown, and dropping oil and commodity prices caused dealmakers to become more cautious. Those concerns were compounded by the UK’s vote to leave the EU and the US presidential election.
Michael DeFranco, global head of M&A at Baker McKenzie commented: “We expect that environment of uncertainty to continue at least for the first quarter of this year and so the forecast predicts deal making to drop slightly in 2017 to $2.5tn from $2.8tn in 2016 as global investors wait for clarity over the UK-EU relationship, and the new US administration’s policies on trade and investment.”
Will Seivewright, corporate/M&A partner at Baker McKenzie Habib AlMulla added: “Instability has been the overriding influence of 2016, but M&A activity in the Middle East appears to be on the cusp of a significant increase, particularly in the UAE where the underlying economic fundamentals, such as anticipated GDP growth continue to draw investors to the region.”
Once greater clarity emerges, the report predicts global M&A activity to pick up to reach a peak of $3tn in 2018 (lower than the $3.4tn peak in the previous forecast). Then deal making will gradually slow in 2019, dropping to $2.8tn that year and $2.3tn in 2020, as global finance becomes more expensive and valuations start to fall.
The forecast predicts IPO activity to rise modestly in 2017 from a weak 2016 and bounce back in 2018 and 2019, as companies that had postponed their listings return to public markets.
The forecast has global IPO activity rising from $133bn in 2016 to $167bn in 2017, then peak at $275bn in both 2018 and 2019.
The statement said that from a sector perspective, a key driver of global deals will be the tech sector, where M&A is forecast to reach $415bn by 2018—the highest since 2000.
Healthcare and in particular biotech and pharma deals will also fuel the upturn amid greater innovation, less potential regulatory intervention in the US, and an increased role for private health providers in supplying public health services.
Deal making in the finance and consumer goods sectors will drop slightly in 2017 before rebounding in 2018. For finance, tech innovation, and consolidation in Europe’s banking industry is likely to boost M&A while the consumer goods sector continues to reap the benefits of cheaper energy and major growth in consumer spending. Because of sustained lower oil prices, deals in the energy sector will only modestly recover in the next few years as oil prices gradually rise, although 2017 could see the listing of the Saudi oil giant Aramco in what would be the biggest IPO in history, the statement read.
A positive outlook
DeFranco concludes in the statement: “Alongside this renewed market activity and investor confidence, global deal making has the potential to rebound in the coming years, given the massive cash reserves sitting on corporate balance sheets and near-record levels of private equity dry powder. Barring further shocks to confidence, investors will have the firepower they need to pursue acquisitions, and their apprehension will gradually turn into appetite.”