Merger activity slowed to a crawl at the end of 2018, and the beat has not picked up in 2019.
Through the first two weeks in March, the total announced value of global M&A is down 27% year over year, Citigroup Inc. Co-Head of Global M&A Mark Shafir said during a March 14 presentation at the Tulane Corporate Law Institute conference. The drop follows a slowdown in activity that started during 2018's final six months, which on average saw about a 30% drop in volumes from the first half of 2018, according to Shafir's presentation.
The lingering effects of equity market volatility during the final months of 2018 could be partly to blame for the drop in activity. Among other effects, turbulent markets can make it more difficult for buyers and sellers to agree on pricing. Shafir said that volatility is still impacting companies' desire to pursue deals.
"People just shut down," he said.
CEO confidence levels about the economic environment is often cited as a measure for the M&A outlook. The conventional wisdom is that executives are more willing to transact when they have more confidence in the economy. During the fourth quarter of 2018, the Conference Board's Measure of CEO Confidence fell to 42, the lowest reading since the third quarter of 2012.
Though Shafir does believe activity will pick up, he expects the total value of deals to have fallen 10% year over year at the end of 2019. The drop could be as steep as 20%, he said.
A lack of M&A activity in Europe has been a significant headwind on deal volumes globally. In the region, the total 2019 announcement value is tracking down 49% year over year, and the number of deals is down 23%, according to a March 13 report from Keefe Bruyette & Woods Inc. analyst Michael Brown. The analyst said the uncertainty of the U.K. leaving the European Union has put many deals involving Britain in a holding pattern.
"Deal activity in Europe this year has been more anemic than we had expected at the beginning of the year," Brown wrote.
European companies also have growing concerns about receiving regulatory approval for deals in the U.S., David Muir, a managing partner for the London-based advisory Hakluyt & Co., said at the conference. In 2018, the U.S. broadened the scope of its Committee on Foreign Investment in the United States, which can block M&A deals because of national security concerns. Muir said he did not think the U.S. was using the committee in a protectionist fashion, but European firms are watching for developments, he said.
Citi's Shafir noted that escalating geopolitical tensions and more restrictive antitrust environments have changed the dynamics of cross-border M&A. U.S.-inbound and China-outbound activity has fallen by half during the last two years, according to his presentation. Shafir said a fairly small number of transactions are blocked, but the threat of not receiving approvals can serve as a deterrent.
"People back off," he said. "They don't transact."