By Bryan Borzykowski
What does the future hold for mergers and acquisitions activity? That’s the question many business owners are asking themselves after the uncertainties of 2016. With Brexit continuing to work itself out, a Trump presidency just taking shape and questions around global growth, executives are wondering whether 2017 will be a good year for making deals.
Not surprisingly, the outlook depends on how certain events play out in the U. S. and abroad, says Tom Cane, managing editor of the Americas at Mergermarket , a company that tracks global M&A activity. With many of President-elect Donald Trump’s policies still unclear —such as his views on anti-trust legislation — and many key appointments not yet confirmed, it’s hard to predict what next year might hold.
Still, some are optimistic that Trump’s business acumen will provide an overall lift. “Deal makers have been telling us that they hope his love of the deal will translate into a pro-business mindset,” Cane said.
There’s also hope that the new year will pick up where 2016 left off. Even with all the geopolitical surprises, 2016 tallied the third best year on record for M&A deals, according to Cane. Activity dropped by 23 percent year-over-year, but with 4,951 mergers the environment remained strong, he says.
Here are four M&A trends to watch in 2017:
1. Still Lots Of Liquidity
Since the 2008 recession, companies have been hoarding cash, but many now want to spend that money, says Gerry O’Meara, head of M&A at SunTrust Robinson Humphrey. According to FactSet , S&P 500 businesses held more than $1.5 trillion in cash in the third quarter of 2016, a 7.6 percent year-over-year increase. Commercial banks also have money to lend, while private equity firms want to spend, he says.
In today’s slower growth environment, many businesses are on the hunt for high-quality companies that will add to the bottom line, despite higher valuations.
“Companies are looking for ways to get a return on their cash,” O’Meara said.
2. Slowly Rising Debt Costs
How fast interest rates rise will affect the M&A sector, says Scott Cathcart, a senior vice president in SunTrust’s Corporate Finance group. Typically, the London Interbank Offered Rate (LIBOR), which is connected to the Federal Reserve’s short-term rate, determines the debt financing rate.
A rise in LIBOR would make it more costly to borrow money, resulting in buyers paying less for companies. If rates rise too quickly, then business owners may have trouble getting the prices they want, says Cathcart.
While the Federal Reserve raised rates in December by 0.25 percent, and it could increase rates further in 2017, hardly anyone expects a large spike in the Federal Funds rate used among banks and other depository institutions. If rates rise gradually, companies won’t feel a material impact.
According to O’Meara, even if rates do rise further, the absolute level will still support elevated M&A activity.
3. Energy, Tech Could Lead The Way
The energy sector, given Trump’s presidential victory, could prove a “very interesting area to look out for,” according to Cane. If friendlier regulations help increase oil and gas production, more deals are likely in the next year.
The technology industry, which has been one of the most active sectors, should also continue seeing high M&A rates, says O’Meara. Internet, tech-enabled services, financial technology and healthcare IT will all experience more consolidation, he projects.
Healthcare, however, could hit the pause button in 2017 due to uncertainty around the fate of the Affordable Care Act under a Trump presidency.
The healthcare industry is also waiting to see how a Trump tax amnesty program might work. If drug companies with international footprints can bring cash back into the U. S. without penalty, the sector could pick up. “We could see more drug companies buying manufacturing assets in the U. S. than elsewhere,” Cane said.
4. Trump’s Pro-Growth Policies
How successfully Trump delivers on his agenda could determine the fate of the M&A space overall. If his GDP-boosting policies pan out — such as investing $1 trillion in infrastructure spending — M&A activity could increase, O’Meara says. Should Trump’s plans not come to fruition, and uncertainty levels rise, M&A activity could drop.
“If we go back into a period of higher market volatility, that will dampen the outlook for M&A,” O’Meara said. “A lot of people are concluding we’re going to get into a higher growth mode as reflected by the equity market, but if we don’t, then clearly we would have less activity. ”
Ultimately, though, business owners have plenty of reasons to remain hopeful. Those who want to sell in 2017 should start planning now: Cathcart recommends making your company as attractive as possible to buyers by boosting valuations, increasing efficiencies, hiring the right operations and finance teams and diversifying revenues.
Do all of that and buyers should come calling. “There’s a tremendous amount of liquidity in the market that companies will be allocating to M&A,” O’Meara said.
Bryan Borzykowski has written three books on personal finance. He also writes about businesses and technology. Bryan is on Twitter @bborzyko.
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