Favorable global economic and financial circumstances can accelerate both the global and the Hungarian M&A market, however, some argue that increases in economic nationalism, protectionism and restrictions on global trade and cross-border economic integration all have the potential to negatively affect deal-making sentiment.
Global deal activity is likely to accelerate in 2018, caused by the easing of key economic and political risks and the emergence of positive macroeconomic deal drivers, states a report on the world’s M&A market.
The third edition of the Global Transactions Forecast, developed jointly by Oxford Economics and Baker McKenzie, highlights why investors around the world are feeling increasingly confident for 2018, with appetites strengthened by positive trends such as more-buoyant world trade and economic growth, elevated equity valuations, and the prospect of cheaper financing in emerging markets. However, the report is quick to emphasize that uncertainty persists over potential protectionist measures in key economies.
According to the forecast, M&A value could exceed USD 3 trillion in 2018, while IPO (initial public offering) value could improve by more than 50% over 2017 to nearly USD 300 billion. Deal activity will peak in North America and Europe in 2018; the rest of world will follow in 2019, it says.
As for the further outlooks, the report says that a range of factors will cool deal activity from 2019 onwards particularly in developed markets, including higher interest rates, a cyclical easing in global trade and investment growth, and a correction in equity prices back towards fundamentals. The forecast predicts M&A values to drop to USD 2.9 tln in 2019 and USD 2.4 tln in 2020.
Another report, the Intralinks Deal Flow Predictor, which predicts future mergers and acquisitions (M&A) announcements, is even more specific. In its latest prediction, it forecasts that the number of worldwide M&A deals announced in Q1 2018 will increase by around 2% compared to Q1 2017.
Intralinks foresees year-on-year growth in the number of announced M&A deals in three out of the four global regions, namely in Asia Pacific, the EMEA region, and in Latin America. In the Asia Pacific area, it sees a massive 14% increase, in EMEA (Europe, the Middle East and Africa), deal activity is expected to be up by 6%, while 3% y.o.y. growth is predicted for Latin America. In North America, on the other hand, M&A activity is expected to fall by 11%, due to an exceptionally strong first quarter in 2017.
As for the EMEA region, Intralinks notes that two of the region’s largest M&A markets, the United Kingdom and Germany, are noticeably failing to contribute towards EMEA’s growth. M&A activity in Germany declined in 2017, with the number of announced deals in the first nine months falling by 8% y.o.y. German early-stage M&A activity also declined in Q3 2017, dropping by 10% on a yearly basis. In the United Kingdom, early-stage M&A activity in Q3 2017 fell by 5% y.o.y.
For the rest of the region, the report states that the situation looks solid, with Eastern Europe, the Middle East, Africa, Northern Europe, Spain and Italy all showing double-digit increases in early-stage M&A activity. The materials, real estate and healthcare sectors are predicted to lead the growth in EMEA M&A announcements over the next six months.
Intralinks, however, also warns of risk factors. These are twofold: political and financial. According to Philip Whitchelo, VP of Strategy & Product Marketing at Intralinks: “Increases in economic nationalism, protectionism and restrictions on global trade and cross-border economic integration all have the potential to negatively affect deal-making sentiment. With global equity markets at record highs, and almost nine years since the last major trough, a correction that turns into a more serious sell-off could also prove negative for deal-making confidence.”
A livening deals market is anticipated in 2018 not only at a global level, but also domestically, by some experts.
“We are expecting an active year on the M&A market globally and in Hungary as well,” Tamás Simonyi, senior director, head of CEE financial institutions M&A advisory at Big Four company KPMG told the Budapest Business Journal.
Tendencies seen last year will likely continue and reach full potential this year, Simonyi says, noting that, like 2017, the property market will surely be a driving force for mergers and acquisitions. “The sale of several high-value properties are under preparation at the moment,” he added.
As for banks cleaning their non-performing loan (NPL) portfolios, Simonyi said that, while the vast majority of portfolios have been sold already, there are some to be completed yet. He also added that some Hungarian-owned large corporations might change hands in the course of 2018, without revealing further details.
Several foreign buyers will also likely appear on the market, however, the areas where their activity is focused is narrowed to those industries that are not of interest to the current administration. “Mainly companies in the manufacturing sector are likely to be targets of foreign acquisitions this year,” Simonyi said.
While this year is forecast to be more active than 2017, the activity of Hungarian companies making acquisitions abroad is still hardly detectable. Only very large companies might be seen on the global M&A scene, such as OTP Bank or Richter, Simonyi said. Medium-sized Hungarian companies, on the other hand, are still not able to nail down major deals abroad, he claims, explaining that, in many cases, they lack not the capital but the willingness to secure a foothold in a foreign market.
An increasing number of private market deals are expected this year, Ervin Apáthy, director of corporate finance at PwC Hungary told the BBJ. “We think that the number of large-scale deals are likely to increase, but not to a significant extent. Due to the favorable financial and economic conditions, we sense that several owners might have an increasing intention to sell, however, the biggest question, of course, is how the financial market will proceed in the future,” Apáthy explained.
In his opinion, the traditionally strong sectors will continue to thrive this year: he expects transactions in the food industry, in the field of financial services and in the technology, media and telecom sectors.
As for the role the Hungarian state might take on the M&A market, Apáthy believes that direct state participation on the market will not be too strong this year, due to the fact that 2018 is an election year.
“According to our experiences, the campaign and the election itself almost entirely occupies the mind of political decision makers, and this shift in focus results in a decreasing number of economic and business decisions,” he said. However, while the players of Hungary’s business scene expect less state intervention this year, it does not mean that the activity of entrepreneurs with state connections will slow down, he added.
Simonyi, on the other hand, think that the upcoming elections will not influence the Hungarian state’s appetite on the deals market. In his opinion, both the state and companies close to the current administration will continue be active in 2018. “The state’s intention, namely to be present in the strategically important sectors, will not likely change this year,” he said.
The good outlook for the M&A market is underlined by the latest report issued by PwC. In its prediction for 2018, the company said that global economic growth was on track to be the fastest since 2011.
In its main scenario, it projects the global economy will grow by almost 4% in purchasing power parity (PPP) terms, adding an extra USD 5 trillion to global output in current value terms. It also expects growth to be broad-based and synchronized, rather than dependent on just a few countries. The main engines of the global economy, such as the United States, emerging Asia and the Eurozone, which comprised 60% of world GDP in 2017, are expected to contribute almost 70% of economic growth in 2018 in PPP terms, compared to their post-2000 average of around 60%.
As for a regional outlook, Ervin Apáthy told the BBJ that the upgrade of the Romanian M&A market is likely to continue if no major changes occur. Experience shows, however, that market swings are much more visible in Romania than in Hungary: upswings are more dominant and setbacks are also much more severe than in Hungary. Under normal circumstances, foreign companies looking for growth potential will find a larger-sized market attractive.
Following Poland, Romania is the region’s second largest market, but, on the other hand, it also deals with deepening demographic problems. The positive evaluation of the Romanian market that was quite visible last year is mainly due to the economic growth the country produced, which was way above the EU average. This was induced by loosening financial politics and a boost in consumption. “For the time being, I do not see any factors that would change the current trends,” Apáthy concluded.