Macro

Impact of Global Economic Conditions on Cross-Border Mergers and Acquisitions

October 30th, 2015 | By Nick Sargen

Remarks delivered at ACG Cincinnati's Forum on October 28, 2015

The bottom line: While recent market volatility has clouded the outlook for global M&A activity, it is unlikely to reverse the trend barring a recession, which we do not expect to materialize any time soon.

Highlights

  • In recent years, M&A activity has been relatively strong in developed economies but softer in emerging economies.
  • During the 12 months ended in March of this year, total deal value globally increased by 38% to surpass $2.1 trillion with blockbuster deals in healthcare, telecom, and technology leading the way.
  • At the start of this year, dealmakers were optimistic that economic conditions would support further rapid growth of cross-border M&A. In a survey conducted by KPMG and Mergers & Acquisitions magazine, the most important factors they cited were (i) large cash reserves and commitments (40% of respondents), (ii) opportunities in emerging markets (19%), (iii) availability of credit on favorable terms (16%); (iv) improved consumer confidence (13%), and (v) improving equity markets (8%).
  • However, conditions turned less favorable in midyear when markets became more volatile and risk assets sold off. Additionally, credit spreads widened, especially for high yield bonds, and world trade slumped, while commodity prices plummeted. The catalyst for these conditions was weakness abroad, especially in China and the emerging market economies.
  • Investors are now well aware China's economy has slowed considerably, but the magnitude is unclear. Policymakers have mishandled the country's stock market and exchange rate policy. The principal risk would be a bust in the property market that impacted financial institutions. While the government would infuse capital into the system, as needed, China could experience a growth recession.
  • The softening in China has impacted emerging market economies and weakened commodity prices and import demand. Countries feeling the fallout include commodity exporters and those exporting goods to China. Several countries are in recession - notably Brazil, Russia, and Venezuela - due to internal mismanagement.
  • According to the IMF's World Economic Outlook in October, real GDP growth worldwide is projected to slow to 3.1% this year - the slowest since the 2008-09 Financial Crisis and a half of a percentage point below the IMF's forecast at the beginning of this year. While the IMF expects growth to rebound next year, past forecasts have proved to be too optimistic.

    IMF Projections

     

    2014

    2015

    2016

    World 3.4% 3.1% 3.6%
    United States 2.4% 2.6% 2.8%
    Canada 2.4% 1.0% 1.7%
    Mexico 2.1% 2.3% 2.8%
    Euro Area 0.9% 1.5% 1.6%
    Japan -0.1% 0.6% 1.0%
    Emerging Markets 4.6% 4.0% 4.5%
    China 7.3% 6.8% 6.3%
  • A key factor that could affect U.S. multinationals is the strong dollar, which will encourage them to base more production offshore.
  • The interest rate environment should remain benign, as policy tightening by the Federal Reserve is likely to be very gradual in 2016, amid low inflation and considerable uncertainty about the global economy.
  • LBO activity could be affected by the widening in credit spreads for below-investment grade borrowers. Thus far, however, it appears to be manageable.