Will the appetite for mega deals continue in 2020?

  • Both strategic and PE buyers expected to be highly active in 2020

  • Backlog of cross-border M&A activity could be unleashed
  • Mega deals to face continued regulatory headwinds

2019 was a record-breaking year for mega deals

United Technologies’ US$121 billion merger with the U.S. defense contractor Raytheon and Bristol-Myers Squibb’s US$89.5 billion tie-up with Celgene made the headlines in the United States, where eight of 2019’s ten largest mega deals were signed.

It was the year that saw two “Merger Mondays” in June and November, when more than US$100 billion of deals were announced in the U.S. market.

Outside of the United States, Saudi Aramco’s acquisition of Saudi Basic Industries Corporation (SABIC) for US$70.4 billion was the scene-stealer, while Europe’s streets remained littered with good intentions.  Although several mega deals were proposed in the EU, including the merger of UK grocer J Sainsbury Plc and Walmart Inc.’s Asda, they failed to move forward, in part due to the EU regulatory environment.

Against this backdrop we have a market, particularly in the United States and increasingly Europe, where M&A-driven activism by shareholders is at an all-time high.  Shareholder pressure on companies to enhance value through transformative corporate transactions, such as spinoffs or divestitures of undervalued assets, is expected to continue. 

Amid this flurry of activity, it is easy to forget that 2019 began with uncertainty and concerns about interest rates, trade wars, and political instability – conditions more likely to hinder than help M&A.  

Backlog of cross-border deals could be unleashed in 2020

As we begin 2020, global economic conditions remain challenging, but in many respects, calmer than where we were 12 months ago.  The elements are in place to support a year of record-breaking activity, with cross-border mega deals likely to play a significant role in proceedings.   

Many analysts believe there is a backlog of demand from 2019, especially in the global M&A market.  The cost of capital remains historically low. There are signs of a softening of attitudes from the protagonists involved in the trade wars of 2019, while the UK edges closer to the exit door from Europe in a more straightforward way than many had predicted.

Cross-border deal making into the United States fell by 15% in 2019, but there are reasons to believe this might change in 2020 with interest from Asia-Pacific set to increase. Japanese outbound M&A was strong in 2019, driven by demographic concerns dragging on growth. There’s every reason to believe that Japanese companies will be active players in the mega deals arena in 2020.

Meanwhile, Europe is at risk of losing its competitive advantage in global markets, given the level of recent transformational deals in North America.  Of the 47 mega deals announced globally in 2019, 36 were North American transactions.  It’s clear that standing on the sidelines may have a significant opportunity cost in the long term.

M&A activity to strengthen businesses and pursue innovation

The appetite among strategic buyers to strengthen their businesses and seek innovation remains high, particularly in the life sciences industry where several global pharmaceutical companies are facing significant patent cliffs..  The critical need to strengthen pipelines is a key driver to the historically high multiples being paid in life sciences mega deals in 2019.  Bristol-Myers Squibb’s acquisition of Celgene came at a premium of 53%, while AbbVie’s purchase of Allergan saw a 45% premium.

Meanwhile, the global private equity market is believed to be sitting on a cash pile worth as much as US$1.4 trillion; in Q3 of 2019 alone, two mega cap private equity sponsors closed funds totalling US$42 billion.  

Notwithstanding the sky-high multiples being sought by sellers, such “dry powder,” together with a robust fundraising environment, may encourage private equity sponsors to reach for ever larger targets.  At the same time, a number of businesses are looking to sponsors as a source to fund expansion and investment, including acquisitions, which could also contribute to a greater number of mega deals in 2020.  Privately held companies, understandably wary of the IPO market, are turning instead to sponsors as a funding source for growth, leading to ever larger privately held companies.  This, in turn, could give rise in 2020 to an increase in the number of mega LBOs by private equity sponsors.

Regulatory environment for mega deals to remain challenging in high tech industries

Perhaps the biggest potential obstacle to mega deals in 2020 is the regulatory environment, particularly in the United States.  Many believed that the advent of the Trump administration would herald a return to a more relaxed 1980s-style Reaganesque approach, leading to far reaching, economic deregulation and industry consolidation.  This has not proven to be the case.  The Trump administration has readily employed tools such as tariffs and stringent regulatory reviews in order to achieve its economic and populist political objectives.

The U.S. regulatory and antitrust authorities have taken a forensic scalpel to many deals, forcing companies to divest assets, provide remedies or even abandon deals altogether.  Deals that were expected to receive rapid regulatory approval have been facing much greater scrutiny, thus extending closing periods and inherently increasing deal risk.  

The extent to which mega deals could be seen as either stamping out “nascent competition” or hindering future “innovation” continues to emerge as a meaningful consideration for regulatory authorities.  The two theories of antitrust harm differ in that allegations based on nascent competition apply to transactions where a more established company acquires a newer, high-growth competitor, whereas allegations based on innovation harm apply to mergers of close competitors. 

One recent example where the FTC utilized both antitrust theories was the proposed merger between Illumina and Pacific Biosciences. Both companies are leaders of next-generation DNA sequencing technologies, although Illumina is focused on “short-read” DNA sequencing and Pacific Biosciences is more focused on “long-read” gene sequencing.  In December 2019, the FTC challenged the merger based on both nascent competition and innovation theories of harm.  In the face of such regulatory uncertainty, the parties decided to abandon the transaction on January 2, 2020.  

In the global technology industry, 2020 may prove to be a slow year for mega deals.  Given an uptick in populist-driven political scrutiny of global technology firms, such as social media and internet giants, these companies may be more likely to face public pressure to sell rather than buy this year. The current regulatory and political environment appears unsupportive of big tech getting much bigger.

Uncertainty remains, but one thing is quite clear - in the current regulatory environment, merging firms should seek to identify, as early as possible, potential regulatory hurdles that might exist, and be prepared with strong arguments and well-tailored antitrust remedies if they are to get the go-ahead from the authorities.

2019 was a record-breaking year for mega deals in the global M&A market, with the United States leading the way. There are plenty of reasons to suggest this trend will continue in 2020 – but the road ahead is likely to remain bumpy.


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