J.P. Morgan’s “2020 Global M&A Outlook” (the Report) reviews what we can expect with regards to M&A activity this year. Some of the key takeaways from the Report include:
- Anticipated Trends in International M&A: We can expect to see an increase in the global M&A market due to greater geopolitical certainty and financially competitive opportunities in regions such as Japan.
- The Role of Private Equity Firms in the M&A Market: With record levels of capital to deploy, private equity firms will continue to be active players in the M&A market.
- Shareholder Activism: Shareholder activists will continue to challenge companies on their M&A activity, questioning the advantages of certain proposed transactions.
Anticipated Trends in International M&A
We can expect to see more international M&A deals in 2020. This sentiment was echoed in a recent Morgan Stanley article, which listed a few reasons for this expected increase, such as there being more certainty surrounding Brexit and the recent signing of the Phase 1 trade agreement by the U.S. and China. More specifically, Japan, who had a record of 53 transactions over $1 billion in 2019, will continue to have a strong year in 2020. It is anticipated that Japanese companies with diversified portfolios of businesses will either spin off these businesses or engage in divestiture transactions. Additionally, due to maintained low-cost funding, Japanese corporations and private equity firms have been encouraged to engage in a greater number of outbound transactions.
The Role of Private Equity Firms in the M&A Market
With the help of sustained fundraising activity, private equity firms will continue to be active in the M&A market in 2020. A recent Bloomberg article and Morgan Stanley article noted that the industry is starting 2020 with an unprecedented amount of cash. Private equity firms, such as Blackstone Group Inc. and Carlyle Group, hold approximately $1.5 trillion in unspent capital, making this year-end total of unspent capital the highest amount in history. Colloquially referred to as “dry powder”, this unspent capital could ultimately mean more M&A activity in 2020. By using this capital, private equity firms could help companies with limited resources to acquire other companies, improve operations and ultimately increase shareholder value. Further, as the costs of borrowing money are low due to low interest rates, we may see more leveraged buyouts. Having the ability to borrow money at a lower rate coupled with a healthy amount of cash, will allow private equity firms to maintain active in the M&A market in 2020.
Shareholder activism, and particularly M&A-driven activism, will likely continue in 2020. As noted in the Report, more and more shareholders have been demanding that companies sell themselves or dispose of individual assets. Over the past three years, demands such as these have increased by 13% in 9M 2019 compared to that of 9M 2018. There has also been an increase in shareholder activists opposing proposed transactions of a company, whereby the activists do not disapprove of the deals in their entirety, but demand a higher price. Additionally, more shareholder activists are also requesting companies to go private, especially in instances where the targets would benefit from a reorganization.
Other increasingly significant topics to investors include environmental, social, and governance (ESG) issues. There have been activist funds created to solely focus on ESG issues alone. ESG issues are not only becoming more important to activist investors, but to passive investors as well.
In 2020, we can expect that companies around the world will continue to use M&A to improve their businesses. Shareholder activism will also continue to be used to encourage more dialogue between shareholders and a company’s management and board of directors in order for there to be more transparency regarding a company’s priorities and how it chooses to allocate its capital. Further, it is anticipated that the record amount of capital that private equity firms hold will likely be employed in the M&A market this year. Although various factors may influence these predictions, we look forward to seeing if they will prove to be true.
The author would like to thank Nazish Mirza, Articling Student, for her contribution to this legal update.
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