Expectations of another bumper year for US M&A failed to materialize in the first half of 2017, as total deal volume fell below 2016 levels.

In the first six months of 2017, there were 2,413 deals, an 8 percent drop from the 2,631 recorded in H1 2016. Value was up, albeit by a small margin, edging 0.5 percent ahead of the US$585.4 billion in H1 2016 to US$588.5 billion in the first six months of 2017. Inbound activity fared a little better, buoyed by activity in the consumer sector, with a deal value of US$209.7 billion for the first half of 2017, up 26 percent on the same period in 2016.

Meanwhile, US dealmakers remain confident acquirers overseas, conducting 592 deals worth US$202.5 billion in the first half of the year, overtaking all half-year value totals on record despite volume dropping 6 percent year-on-year.

Dealmakers temper their expectations

There was an expectation that momentum from the last quarter of 2016 (when close to US$500 billion worth of deals were announced) would carry into 2017. The expectation was built around continued stock market growth and the business-friendly agenda of incoming President Donald Trump, who had laid out plans to cut personal and corporate tax rates, reduce the taxation of overseas cash piles repatriated to the US, invest US$1 trillion in infrastructure and roll back regulation.

Trump's agenda has been thought to be beneficial for business, but there are now substantial questions about whether he can implement it, and you have to price that in.

However, doubts about Trump's ability to move his agenda through the Capitol have emerged after an unsuccessful attempt to push through healthcare reform and the botched execution of an immigration order. These factors have weighed on initial optimism.

"M&A activity does feel a bit lackluster when compared to previous years," says John Reiss, Global Head of M&A at White & Case. "Trump's agenda has been thought to be hugely beneficial for business, but there are now substantial questions about whether he can implement it, and you have to price that in."

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Consumer spending spree

Scale is defined differently now. Scale is not defined by stores and leases. It’s defined by clicks and ad revenues.

Dealmakers will be encouraged by a return to strong activity in the consumer sector, which delivered US$132.9 billion worth of transactions and was the most active sector by deal value in H1. This is a marked improvement for the industry, which was only the sixth-largest sector by deal value last year and has already delivered a higher value in the first half of 2017 than it did in the whole of 2016. Growth in consumer M&A can bode well for wider M&A activity, as consumer M&A is a good barometer of disposable income, employment levels and economic growth.

The deal activity in consumer will also have a positive effect on technology M&A, as consumer companies increasingly rely on digital and online platforms to sell and market their products. Amazon's US$13.5 billion purchase of grocer Whole Foods is a prime example of how deal activity in one sector spills over into another.

"Consumer habits have affected the way companies approach their acquisitions, and convergence between industries does drive activity in different sectors in new ways," says White & Case partner Michael Deyong. "Scale is defined differently now. Scale is not defined by stores and leases. It's defined by clicks and ad revenues."

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China puts on the brakes

There are some concerns that the US is perhaps not as friendly to China as it used to be, and if you put that together with the limitations in China on capital outflows, then it does put inbound M&A from China under pressure.

China showed almost insatiable appetite for foreign companies in 2015 and 2016, with deal value more than doubling 2015's record levels to US$207.4 billion. But restrictions in China now require the foreign exchange regulator to screen and approve any deal worth more than US$2 billion, which could hinder outbound activity.

In 2016, China was the third-biggest inbound M&A investor into the US, with US$62.6 billion worth of deals. Only Canada and Germany closed deals worth more. In the first half of 2017, however, China ranked only ninth, with US$6.1 billion worth of deals.

Trump's "America First" rhetoric may prove a further barrier for Chinese firms looking to do deals in the US. The decision by US authorities to block Fujian Grand Chip Investment Fund's US$550 million acquisition of technology group Aixtron last year due to national security concerns also indicates the increased scrutiny surrounding Chinese investors pursuing even non-US transactions with an affiliated US business involved.

"There are some concerns that the US is perhaps not as friendly to China as it used to be, and if you put that together with the limitations in China on capital outflows, then it does put inbound M&A from China under pressure," Reiss says. "That is a concern, because China has been one of the most important stories in the M&A market in recent years."

Strong fundamentals persist

M&A remains a strategic imperative for corporates that need to grow, private equity has money to invest and the financing market is supportive. If you look at the fundamentals, they are favorable.

Despite these headwinds, deal figures for the first half of 2017 remain high by historical standards. Deal volume and value in H1 2017 was higher than in any H1 period from 2011 to 2013. There may be some signs that the market is slowing after record levels of activity from 2014 through 2016, but the outlook for M&A is still positive on balance.

The US economy is expected to continue growing steadily, with the World Bank forecasting growth of 2.1 percent in 2017 and 2.2 percent in 2018. This is higher than forecasts for the Eurozone and compares favorably to faster-growing but riskier emerging markets. Debt markets are open and with interest rates at 1 percent (significantly lower than 5.8 percent average over the last 50 years), financing is accessible and cheap.

Given these solid economic fundamentals, it isn't a great surprise that the seven of the ten largest M&A deals in the world in H1 2017 involved either a US bidder or a US target. The US remains an attractive jurisdiction for overseas buyers, with five of the ten largest US M&A deals in the first six months of the year involving a bidder from overseas.

"Even when you put aside the benefits of the pro-business Trump agenda, the US is in good shape and continues to give buyers confidence. M&A remains a strategic imperative for corporates that need to grow, private equity has money to invest and the financing market is supportive. If you look at the fundamentals, they are favorable," Reiss says.

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