J.P. Morgan’s global M&A; review says consolidation activity remained strong in 2018, with US tax reforms a notable new driver for the market. The investment bank expects that strong performance will spill over into 2019, with action in the US$1bn-US$10bn segment especially robust.

After strong global M&A; activity in 2018, with transaction volumes reaching US$4.1trn, company consolidation over the year ahead is expected to remain buoyant, with the market driven by continuing pressure on companies to review their business structures and unlock value, according to J.P. Morgan.

According to the investment bank’s 2019 Global M&A; Outlook, 2018 panned out to be the third-highest year ever for M&A; volumes, with activity largely driven by “megadeals” (greater than US$10bn in size). Thirty megadeals were announced in the first six months of 2018 alone – the highest first-half megadeal count on record – compared with 14 deals in the first half of 2017.

While megadeals were a large driver of M&A; in 2018, the count for deals greater than US$250m also increased by 7% from 2017, with activity remaining robust across all deal types. Activity was brisk across domestic and international deals, strategic and private equity, and across all sectors, with technology (17%) and healthcare (12%) representing the largest contributors to global volume in 2018. Cross-border M&A; volume remained strong, accounting for 30% of the total M&A; market.

Several of the key drivers and catalysts of M&A; in 2018 spilled over from prior years, namely positive global growth, improving cash flows, strengthening balance sheets, low cost of debt, investor support and CEO confidence. The study says the biggest new tailwind this year was the implementation of tax reform in the US, which helped generate incremental cash flows and provided access to overseas funds.

While geopolitical uncertainty was prominent throughout the year and created many headlines, it had limited effect on deal volumes in the first half of the year but may have contributed to the deceleration of activity toward the end of 2018.

The regulatory environment remained challenging as large deals took longer to close, including Monsanto/Bayer (746 days), Linde AG/Praxair (681 days) and Time Warner/AT&T; (601 days), or were withdrawn entirely in the case of Qualcomm/Broadcom, NXP/Qualcomm and Ant Financial/MoneyGram.

Shareholder activism here to stay

For the year ahead, J.P. Morgan sees “corporate clarity” being one of the key themes driving M&A; activity, with pressure remaining on companies to review their business structures and unlock value. While many of the effects of US tax reform and repatriated cash were used for share repurchases and dividends in 2018, the investment bank anticipates that boards will also deploy extra cash for acquisition-driven growth.

While regulatory and geopolitical headwinds and macroeconomic uncertainties are likely to persist in 2019, J.P. Morgan expects M&A; activity over 2019 will remain strong, with activity in the US$1bn-US$10bn segment continuing to be especially robust.

Shareholder activism has become increasingly prevalent in recent years and J.P. Morgan believes it has now “solidified itself as a permanent investment strategy in the international financial markets and is expected to drive further focus on core operations across companies globally”.

The study adds: “We have seen activists disrupt traditional businesses in the US and Europe and expect similar strategies to take on a more global scale. Alternative sources of capital, including sovereign wealth funds and family offices, will continue to raise funds at a rapid pace. This new money can be deployed in unconventional ways to facilitate M&A; transactions, leading to more options for both buyers and sellers in 2019.”