Boardroom ‘Gut Check’ Set to Drive M&A

Company boardrooms feel pressure to do deals to deliver growth to shareholders.

Illustration by Andrea Manzati

Illustration by Andrea Manzati

It was a tale of two contrasting dynamics for the U.S. mergers and acquisitions market last year, as the number of deals rose while the dollar value fell. But with the M&A spigot opening up toward the end of 2017, larger deals may help forge a new landscape this year.

Many deal experts expect the dollar volume and number of transactions will both rise as the stock market and economy remain strong. They point to companies’ bountiful cash reserves and the White House’s laissez-faire approach to most mergers.

Psychology is a key element, says Sam Farnham, Wells Fargo & Co.’s head of M&A for the Americas. “There’s a gut check for M&A confidence in the boardroom,” he says. When chief executive officers and company boards are confident about the economy and the stock market, they are generally more confident about doing mergers.

“That’s what we see now,” Farnham says. “Our clients feel pressure to deliver on that growth, and they will have to look outside of just the organic side.”

Last year the number of deals in the U.S. climbed to 10,075 — up 5 percent from 2016 — even as volume dropped 13 percent to $1.5 trillion, according to Dealogic. Investors’ appetite for smaller mergers was strong, while larger deals gained momentum in late 2017, despite President Donald Trump’s opposition to AT&T’s agreement to buy Time Warner for nearly $109 billion including debt. The dollar value of M&A for the final two months of 2017 totaled $486 billion, a record for the period, according to Dealogic, which tracks data back to 1995.

“The market was applauding accretive transactions,” meaning ones that would quickly boost earnings for the acquirer, says Stephen Arcano, head of M&A at law firm Skadden, Arps, Slate, Meagher & Flom in New York. He says companies were looking for acquisitions to build out their businesses, asking, “‘What do I need to plug a hole?’”


For some companies, the hole was in technology. In November, for example, electric-car company Tesla agreed to buy one of its suppliers, Perbix Machine Co., which builds highly automated manufacturing machinery. “Technology is changing everything,” Arcano says. “Previously, in many industries, companies didn’t have to think about directly competing against tech companies, but now that’s increasingly an issue.”

On the regulatory front, the M&A community anticipates Trump will take a favorable stance toward large-scale corporate mergers. The only big acquisition he has opposed is AT&T’s pending purchase of Time Warner. The U.S. Department of Justice announced in November that it had filed an antitrust lawsuit to block the deal on concern it would hurt competition and lead to “higher prices and less innovation for millions of Americans.” After the U.S. District Court set a merger trial for March, the telecom company said in a regulatory filing that its deadline to complete the deal, announced in October 2016, was extended to June 21.

Trump’s surprise win in the November 2016 presidential election is partly blamed for the slowdown in large deals for most of last year. “It was a reaction to the election,” says Roger Foltynowicz, a money manager at Water Island Capital, an event-driven investment firm. He says dealmakers had to adjust to new policies and regulators, creating some initial hesitation.

While some M&A experts see Trump’s rejection of the AT&T merger as muddling the regulatory outlook, Foltynowicz says the president has made clear he’s generally supportive of dealmaking. In November, Broadcom announced that it had offered to buy Qualcomm in a $130 billion deal, and in December, Walt Disney Co. said it was purchasing 21st Century Fox for $66 billion including debt. Meanwhile, favorable conditions remain for deals to keep flowing this year.

“High cash reserves, a friendly debt market, accelerating economic momentum, and confidence are still there,” says Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. “And the tax bill relieves uncertainty.”

She expects activity will be particularly strong in the financial services and media sectors, with the Trump administration’s pullback from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act likely to encourage bank mergers. “This will allow banks to buy deposits, and that’s what they want to do in this environment,” Foltynowicz says of the regulatory rollback. “This will be a big talking point for our community in the next three to four years.”

Within private equity, M&A fell in 2017 for the second straight year in the U.S., declining about 5 percent from 2016 to $321 billion, according to Dealogic. Still, Foltynowicz says private equity firms’ presence as buyers should be strong this year due to the record dry powder they’ve accumulated in a torrent of fundraising.

Wells Fargo’s Farnham sees a growing gap between buyers and sellers in valuation estimates. “We’ve been involved on the buy side where B-quality sellers indignantly tell us we’re way off the market,” he says. “Maybe sellers need to come down.” Jason Brady, CEO of Thornburg Investment Management, views this as a sign that the M&A boom is in its later stages. “When investment bankers are the coolest heads in the room, that’s an interesting dynamic,” he says.