Dealmakers see slower 2019 as stocks, politics drag on M&A

Dealmakers are bracing for a slower 2019, predicting that stormy equity markets, intensifying political uncertainty and weakening economic conditions could cool a five-year boom in transactions.With 10 days left of 2018, the fourth quarter – traditionally the strongest in a year – is on track to be the worst since 2013, with just $776.7bn of deals announced, according to data compiled by Bloomberg. The euphoria over US tax reform that drove many companies to do deals earlier in the year gave way to nervousness about a rise in protectionist policies and worsening conditions in the credit markets in the second half, when volumes fell 20%.Still, companies around the world struck $3.7tn of transactions through December 19, the data show, making it the third-biggest year on record, behind 2007 and 2015. Bankers remain optimistic that technological disruption, the quest for earnings growth and companies’ need to keep simplifying their businesses will fuel deal activity in 2019, albeit at a lower volume than this year.Nielsen Holdings, Papa John’s International Inc and Mellanox Technologies were pegged as the most likely takeover candidates in the US next year in a Bloomberg News survey of traders that focus on mergers, analysts and fund managers.So what’s keeping dealmakers up at night? “There are two areas where it’s fair to be concerned – continued market volatility and continued regulatory uncertainty could affect M&A levels,” said Robert Kindler, global head of mergers and acquisitions at Morgan Stanley, which closed more transactions than any other U.S bank this year.The benchmark S&P 500 has lost almost 15% since September and is hovering near the first bear market in a decade. Makan Delrahim, the head of the US Justice Department’s antitrust division, acknowledged this year that significant mergers are taking longer to review, requiring an average of 10.8 months to resolve in 2017, up from 7.1 months in 2013. Delrahim has vowed to resolve investigations within six months. “Volatility in the equity markets is probably the biggest factor that’s put the brakes on a bit,” said Dusty Philip, co-head of global M&A at Goldman Sachs Group. “What we’ve seen is a lot of companies decide to push transactions to next year.’’Antitrust holdups aren’t just a concern in the US “There remains a nervousness about the very large deals, which tend to involve regulatory approvals from multiple countries,” said Chris Ventresca, global co-head of M&A at JPMorgan Chase & Co.The machinations of Brexit are top of mind for many dealmakers concerned that the second-biggest M&A market in the world could be affected by what kind of a deal the UK eventually strikes with the European Union.“An adverse outcome from the current Brexit negotiations could negatively impact M&A activity in 2019,” said Gary Posternack, global head of M&A at Barclays Bank. “A slowing European economy or even continued uncertainty about the future UK/EU relationship could have ripple effects globally,” he said.As British Prime Minister Theresa May wrangled with her government over a Brexit package this month, dealmaking volumes in the UK dropped to just $7.7bn - the worst December since 2012.The concerns aren’t limited to the UK. “Geopolitical uncertainty is the biggest risk,” said Luca Ferrari, co-head of Europe, Middle East and Africa M&A at Bank of America Corp The outcome of elections in Italy and Sweden, French President Emmanuel Macron’s declining popularity and German Chancellor Angela Merkel’s diminished position contributed to making the second half the worst since 2007, he said.The state of the financing markets is another factor that could weigh on dealmaking next year. While interest rates remain at historic low levels, levered deals that rely on loan investors for funding could be hurt by the recent declines in loans and high-yield bond markets. Morgan Stanley’s Kindler said he’s expecting a downturn in private equity and go-private transactions next year because of “disruption in the high-yield market”.Investors soured on risky corporate loans toward the end of the year amid a more dovish stance on rake hikes from the Federal Reserve and concerns about global growth. That has driven leveraged loan prices down to levels not seen in more than two years and is forcing banks to keep some of the unwanted debt on their balance sheets.On the other hand, private equity companies have more cash on hand than ever before and are ready to take advantage as prices fall with the declining markets.