Trade talk tensions are threatening a potential pickup in M&A activity in 2019.
The total value of global announced M&A deals increased sequentially 21.9% in the first quarter to $859.63 billion, after falling during the two previous quarters, according to S&P Global Market Intelligence's latest "M&A and Equity Offerings Market Report." However, the number of announced deals fell to 10,552, the lowest count since the third quarter of 2017.
Click here to read the full Q1'19 M&A and Equity Offerings Market Report and to access data exhibits.
The trade war between the U.S. and China is negatively affecting cross-border deals between companies in those countries, and an escalation of U.S. trade conflicts would only exacerbate the trouble. The headwinds for deal-making could spread if the U.S. turns its attention to Japan and Europe after China, RYZZ Capital Management LLC Chief Investment Officer Chris Stanton said in May during the Market, Transactional and Private Equity Outlook 2019 webcast.
"If that's what's going to happen, it's going to introduce an awful lot of volatility," Stanton said.
Stanton said the trade issue could resolve quickly, but he could also see it dragging through the 2020 election cycle if President Donald Trump and other Republicans want to force Democratic candidates to take positions on the topic.
Other geopolitical issues are also creating difficulties for deal activity. The number of first-quarter announced M&A transactions in the U.K., which is dealing with uncertainty over its exit from the European Union, increased to 796 in the first quarter from 768 in the year-ago period, but the total value of the transactions dropped 83.4% to $31.09 billion.
Until clarity around Brexit increases, "it's very hard to have enough confidence to pull off large-scale M&A transactions" involving U.K. companies, said Neil Morganbesser, president and CEO of investment bank DelMorgan & Co., during the private equity outlook webcast.
Within the U.S., political battles negatively impacted capital-raising activity during the first quarter. The SEC operated with a reduced staff during the partial government shutdown, which ended Jan. 25, and this delayed the processing of equity deals. Initial public offerings were especially affected. The U.S. produced just 29 IPOs in the first quarter, the lowest total since the fourth quarter of 2016.
Still, activity picked up later in the quarter, most notably with Lyft Inc.'s $2.34 billion IPO. In the second quarter, more sizable IPOs have priced, including Uber Technologies Inc.'s $8.1 billion deal, Pinterest Inc.'s $1.43 billion deal and Tradeweb Markets Inc's $1.24 billion IPO.
Some of the new entrants to the public markets, including Lyft and Uber, have seen their stock prices come under pressure. But just about all U.S. stocks have faced a more volatile environment in the second quarter as the U.S. and China have locked horns in the trade battle.
The U.S. could provide more market tension later in the year when its divided Congress faces a deadline to decide whether to raise the federal debt ceiling. In the past, debates over raising the debt ceiling led to volatility because inaction could lead to the U.S. defaulting on its obligations. If such volatility happens again, the outlook for deal activity could be gloomy.
"Volatility by itself isn't necessarily bad, but artificial volatility produced by these political actions is almost always bad," Morganbesser said.