Global M&A is set for one of its strongest years on record, following a Q3 in which US$722.6 billion worth of deals were announced. This represents a 0.5% increase compared with the same period in 2017. However, volume was down on the same period last year by 20%, or by 988 deals.

The Q3 value total follows the most active first half in more than a decade in terms of aggregate dollars invested. In H1, US$2 trillion worth of deals were announced, a period last bested in 2007.

Large deals are having an outsized influence on the M&A environment as dealmakers remain confident despite geopolitical uncertainty. Indeed, the top ten deals accounted for 22% of the overall value of M&A in Q3.

Energy and mining lead among sectors

A handful of headline deals in Q3 has helped to make energy, mining & utilities the most targeted sector by value through the first three quarters of the year, with a total of US$546.2 billion.

After years of restructuring, energy companies have returned to the deal table, driven in part by the continued recovery in global oil prices. Among the major energy transactions announced in Q3, a Hong Kong-based consortium agreed to acquire Australian gas pipeline infrastructure company APA Group for US$16.3 billion, and BP announced its US$10.5 billion purchase of US shale business Petrohawk.

In the mining industry, Canada’s Barrick Gold agreed to pay US$5.3 billion to acquire UK-headquartered Randgold Resources.

Tax reform fuels dealmaking

Another contributing factor to M&A activity is the US federal government's tax overhaul. With US corporate tax slashed from 35% to 21%, US companies have more cash on their balance sheets available for deals. This reduction of the tax burden will encourage deal activity, both domestically and abroad.

Four of the five largest deals of Q3 took place on US turf. These include two of the aforementioned energy transactions: semiconductor company Broadcom’s announced US$18 billion acquisition of software business CA Technologies, and Brookfield Asset Management’s agreement to purchase Forest City Realty Trust, a real estate investment trust (REIT), for US$9.5 billion.

Could protectionism cancel out tax gains?

In principle, this tax incentive should also motivate non-US buyers to seek assets in the US. However, heightened protectionism appears to be keeping acquirers at bay. The first half of 2018 saw US$110 billion worth of deals for US targets by foreign firms, the lowest opening half since 2013.

Specifically, the ongoing trade war between the US and China is being watched closely. The International Monetary Fund has warned that the tariffs could inflict "significant economic cost" on both nations’ growth, and any significant shocks to either country’s economy may diminish the current buoyancy in M&A.

A further reason for caution is the US Federal Reserve's recent interest rate hike, the third of the year. Acquisition finance has benefited from a low-rate environment. Rising interest rates could negatively affect the economic calculations of potential buyers and act as a drag on deal activity.

This year looks to be one of the strongest on record for M&A, certainly at the top of the market. But rising rates and geopolitical uncertainty could soon have an impact.