While market uncertainty surrounding tax reforms and NAFTA negotiations caused sector deal value to take a hit in 2017, technological convergence continues to generate a healthy level of deals.
Dealmaking within the industrials and chemicals sector relies on stable market conditions to prosper. Many companies in sub-sectors such as automotive and manufacturing require clear direction on future trading relationships before committing to large expenditures on M&A. As such, uncertainty surrounding the impact of tax reform and the future of NAFTA resulted in a softer M&A market in 2017. While deal volume edged 1 percent ahead of 2016 to 885 deals, deal value halved to US$107.4 billion.
NAFTA gamble too big a risk
The NAFTA trade agreement helped the US automotive industry to prosper, with a lot of imports used by manufacturers coming from North of the border. The ongoing NAFTA negotiations with Canada and Mexico hold considerable uncertainty for the future of the US automotive industry. As such, dealmakers may wait for a clearer picture to emerge before they take their business further. “If you are an acquirer in the automotive industry with a big balance sheet and ready access to cash, are you going to roll the dice with the uncertainty now on what NAFTA will ultimately look like? It is likely a lot easier and a lot safer to just buy back shares or pay a dividend,” says White & Case partner Michael Deyong.
Crossing sector lines.
Convergence has changed the nature of M&A in the sector, with transactions conducted across sector lines becoming the new normal. “You don’t just see manufacturing company A buying manufacturing company B anymore,” Deyong says. Despite the brake that policy uncertainty may have placed on industrials and chemicals deal activity, the rapid convergence between technology and businesses in manufacturing and automotive has meant that deals within the sector continue to close. Technology company Intel Corporation, for example, paid US$15 billion for Israeli advanced driver assistance system developer Mobileye, which positions the tech group as a key player in automotive manufacturing. “Companies are planning for up to five years in advance and are acquiring businesses now that will allow them to shift and adapt in the digital age,” Deyong adds.