Mounting macro-level worries around rising interest rates and trade tensions with China have hit the public markets hard enough to send all three major US indices down overall for the week. And anxiety around these issues could in time provide dealmakers with a number of good reasons not to make the M&A leap.
But steady economic growth in the US throughout 2018 has buoyed confidence among executives weighing up domestic targets in particular, according to Ernst & Young's latest Capital Confidence Barometer, with 54% of the over 500 US C-level respondents polled expecting an overall uptick in their M&A activity over the next 12 months.
"Although geopolitical uncertainty in the past may have provided for far more paralysis until more certainty emerged, the resiliency of the deal market over at least the last five years in the face of various sources of geopolitical uncertainty has demonstrated that great buying opportunities still exist." Bill Casey (pictured), EY Americas Vice Chair of Transaction Advisory Services, told PitchBook. "With that in mind, dealmakers are increasingly taking a longer-term view of investment opportunities in Canada and Latin America. In addition, digital disruption is causing deal activity, despite geopolitical uncertainty."
But increasingly unpredictable regulatory and policy moves have supplanted disruption as the principal source of anxiety among US executives, with some 38% citing the former as a risk in mind while surveying the M&A landscape, while the challenges of identifying high-quality assets garnered 26% of the responses. Nevertheless, given that at the time of the survey, NAFTA was still TBD, the new iteration of the US, Mexico, and Canada Agreement should reduce some cautionary sentiment on that front.
38% of US executives see regulation and political uncertainty as the biggest potential risk to dealmaking in the next 12 months, while 26% cite difficulty in identifying high-quality assets
"It's really good news for really all three countries," Casey said. "From an M&A perspective, it's going stimulate M&A for sure around sourcing and the supply chain issue for companies with exposure to Canada and Mexico. It's in part a question of 'build it or buy it,' which should further spur interest in Canada, Mexico and perhaps beyond into Latin America."
That confirms one of the more interesting findings from the CCB. Although most executives—some 72%, no less—find economic conditions in the US to be on the up, representing an increase of 29% YoY, their optimism about cross-border opportunities extends little beyond North and South America. Indeed, Brazil and Argentina rank alongside the US, Canada and Mexico to round out the top five investment destinations of those polled. Meanwhile, for executives on the outside looking in, the US remains a massively appetizing prospect.
"Where would you look outside the US? A strong economy through the first half of this year has made companies based in the US very appealing investment and acquisition targets. If you're outside of the US, you want in," said Casey.
For those eyeing the other side of the pond, ambivalence over Brexit has taken root with only six months left to hammer out a new deal between the UK and the EU. This situation prompted 49% of US executives to suggest that they will take a hard pass on financial services from London-based providers, while another 49% of US executives cite no change to their strategy.
The increased frequency of portfolio review has also driven the expectation that private equity funds will be a direct source of competition with corporates over the next 12 months.