Optimism is the name of the game for the U.S. M&A market. A recent report by Deloitte cites positive tax reform, a relaxed regulatory climate and growing cash reserves as the primary reasons for expecting 2019 to be a big year for M&A. 79% of the 1,000 U.S. corporate executives and private equity firms surveyed said their organizations will close more deals in 2019 than 2018. 70% of the respondents also expect the aggregate value of deals closed to exceed 2018, with over half of deals expected to be between $500 million and $10 billion.

Interestingly, divestitures are expected to make up a critical component of overall M&A activity for 2019. 81% of respondents said they will sell units or portfolio companies in 2019, up from 70% last year. Corporations cited financing needs, change in strategy, and unneeded technology as the main reasons for future divestment. On the other hand, private equity firms primarily expect their divestments to be strategic sales.

The results show a significant shift in the factors expected to drive the corporate respondents M&A strategy. The previous number one strategic driver, acquiring technology assets, dropped to number three as companies appear to be focusing more on their customers, products and services. The most important driver of corporate M&A strategy was expanding the customer base in existing geographic markets, with expanding and diversifying products and services coming in closely behind at number two.

Looking abroad, one third of participants stated foreign targets will account for at least half of their M&A activity. Canada remains the most likely target for U.S. cross-border M&A. 44% of corporate respondents and 38% of private equity respondents expect to pursue a target in Canada. China ranked number two with 28% of total respondents expecting to target China for their M&A deals. Conversely, Brexit continues to tank the UK’s marketability as 24% of respondents (down from 31% last year) expect to make a deal in the UK.

Despite citing economic forces, tariffs, and other local and international legislation as possible curbs to deal activity and success, nearly 90% of all respondents anticipate the current level of M&A activity to continue or grow. Overall, respondents are looking favourably upon the new year for their M&A investment activities.

The author would like to thank Travis Bertrand, articling student, for his assistance in preparing this legal update.

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