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Large M&A deals sailed through a stormy 2018


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Large M&A deals sailed through a stormy 2018

Despite a wave of market volatility, buyers keep pursuing megadeals.

Globally, companies announced 103 deals with a transaction value of at least $5 billion in 2018, which is the second-highest total since 2007, according to S&P Global Market Intelligence data as of Dec. 28, 2018. Much of that activity came from the U.S., where 55 announced deals reached or exceeded $5 billion in 2018, up from 37 in 2017. Companies continued to pursue the large transactions even as volatility picked up in U.S. markets throughout the year.

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The Cboe Volatility Index, or VIX, which measures investor expectation of implied volatility in S&P 500 Index options, saw an average close of 16.6 in 2018, up from an average close of 11.1 in 2017. The fourth quarter was the most volatile period in 2018 based on the VIX's average close of 21.1, up from 12.9 in the third quarter.

Market watchers often cite a VIX value above 20 as an indicator of a less stable economic environment. Increased volatility can make executing M&A deals more challenging because buyers and sellers have a more difficult time agreeing on price when markets fluctuate. Volatility and fears of a weakening global economy slowing down M&A activity have put pressure on the stock prices of financial advisory-focused investment banks.

However, investment banking executives typically say that short periods of volatility do not have much impact on M&A volumes. Evercore Inc.'s management believes that the recent volatility would need to last about six more months before it drives a notable slowdown in M&A, according to a Dec. 27, 2018, report from JMP Securities LLC analyst Devin Ryan.

That sentiment was supported by the announcement of a merger that came to market shortly after the new year. Bristol-Myers Squibb Co. said Jan. 3 that it agreed to a massive deal with a transaction value of $94.98 billion for Celgene Corp. At that valuation, the transaction is larger than any deal announced in 2018.

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Curt Moldenhauer, a partner in PwC's deals practice, said he expects dealmaking to remain active. Even in an economic slowdown, Moldenhauer said potential buyers should still have the resources to execute deals.

Moldenhauer noted that successful fundraising efforts have also given private equity firms plenty of dry powder, and corporations have more cash for investments thanks in part to tax reform.

"There is so much capital to do deals," he said in an interview. "That factor is going to out-influence any economic or any other headwinds in terms of 2019 activity."

Moldenhauer also said higher interest rates can lead to fewer M&A deal announcements, but rates are still historically low.

For years, easy access to low-cost credit has helped increase dealmaking activity, and that was no different in 2018. The U.S. leveraged loan market topped $1 trillion for the first time in April 2018, and financing M&A is the biggest driver to new issuance in that market. Expectations of slowing economic growth coupled with higher interest rates has raised concerns that defaults could increase and that the financing markets will become less accessible for issuers.

Moelis & Co. Chairman and CEO Kenneth Moelis said trouble in the credit markets could make it more challenging for private equity firms to execute acquisitions, but that has yet to happen. "For right now, I see financial sponsors very active and continuing to be active," he said during a December 2018 investor conference.

Moelis also said he sees technology driving M&A in different sectors. At one time, companies could afford to develop their own technology, but the speed of change is becoming so rapid that corporations increasingly need to make an acquisition to keep pace, he said.

"If you fall behind, your competitor will dominate you," Moelis said.

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In 2018, the technology, media and telecommunications space saw an increase in large M&A deals: the number of transactions in the sector with a value of at least $5 billion increased to 19 from 11 in 2017. Moelis is not the only investment bank executive who sees technology as a catalyst for M&A.

"Technological disruption has become a theme, which I don't think is going to go away over the foreseeable future," Lazard Ltd. Chairman and CEO Kenneth Jacobs said during an industry conference in December 2018.

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