The dealmaking boom of 2018 could shape up to be one of Wall Street's greatest years on record

The dealmaking boom of 2018 could shape up to be one of Wall Street's greatest years on record
  • Wall Street dealmaking is having a record year, with mergers and acquisitions volumes at nearly $1.7 trillion.

  • Top M&A execs told Business Insider the pace may not continue at this level of intensity, but given the market trends, they expect deals to continue to flourish.

  • "Other than a major shock to the system, I foresee the current M&A trends playing out for some time," Navid Mahmoodzadegan, co-president of Moelis & Company told Business Insider.

Wall Street broadly expected 2018 to be a strong year for dealmaking, as US tax reform and widespread global economic growth paved the way for a string mergers and acquisitions.

But what's unfolded has perhaps surpassed even the most bullish expectations.

To date, 2018 is the most active year for dealmaking on record, according to data from Bloomberg, with nearly $1.7 trillion worth of deals announced across the globe.

That pace puts the market on track for $5 trillion in deals, which would blow away pre-financial crisis level highs when mergers topped $4.6 trillion in value in 2007.

Merger Monday returned this past week, with three mega deals announced, including a $26 billion merger between telecom giants T-Mobile and Sprint; oil refiner Marathon's acquisition of Andeavor for $23 billion; and Wal-Mart's sale of its UK grocery business Asda to Sainsbury for $10 billion.

Top Wall Street bankers told Business Insider they don't expect the M&A blitz to continue at quite this torrid of a clip, but, aside from an unforeseen shock to the system, they do expect the year to finish among the strongest in Wall Street dealmaking history.

"We don’t see it remaining at this pace," Mark Shafir, global co-head of M&A at Citi, said. "But even if it's off a bit we think it's going to be a very strong year."

He estimated the final global tally would fall in the low $4 trillion to $4.5 trillion range — within reach of peak levels.

"All of the forces that have led to the really strong M&A market this year are likely to be in tact for the foreseeable future," said Navid Mahmoodzadegan, co-president of Moelis & Company.

What's feeding the boom

Mahmoodzadegan said deal volume has improved across the board, but especially at the mega-deal level — transactions that exceed $10 billion in value.

2017 was strong, finishing with $3.7 trillion in deal activity, but megadeals were sparse the first half of the year. Bankers instead relied on smaller transactions to boost volmes.

In the latter half of 2017, the number of megadeals rebounded strongly, and the flood hasn't abated since — there have been more than ten mergers or buyouts valued above $15 billion in 2018.

Borrowing rates still remain low and the passage of US tax reform have helped spur deals, as companies have begun to bring back piles of foreign cash. A new lowered corporate tax rate from 35% to 21% has also contributed to deal activity.

The lower tax rate makes deal math easier, and it "reduces the friction costs" of selling non-core businesses, Mahmoodzadegan said.

But the most crucial factor spurring the onslaught of mega-deals since last summer: the Amazon effect.

Amazon's $13.7 billion takeover of Whole Foods sent tremors through several industries, and served as a wake-up call to every corporate boardroom across America: No industry is safe from tech disruption.

"The biggest and most important driver is the rapid technological change that's ripping through just about every industry," Mahmoodzadegan said. "That's causing companies and corporate boards and CEOs to really look at their asset mix and competitive positioning in light of those changes."

"You've got massive tech disruption, and we're seeing an increase in non-tech companies buying tech companies in their spaces," Shafir added.

Two of the hottest sectors for investment banks have been healthcare and consumer/retail, which has sparked a talent war of late for top bankers in these industries.

What could potentially derail dealmaking

As frothy as the environment is, risks still exist.

The unpredictability of President Donald Trump's administration still poses uncertainties, especially given his administration's willingness to subject deals to antitrust scrutiny.

Broadcom found that out the hard way after its $117 billion hostile bid for chipmaker Qualcomm unraveled at Trump's behest in March. The legal battle over the AT&T-Time Warner tie-up is still unfolding.

But a tough antitrust environment isn't new or unique to the Trump administration, noted Lazard CEO Kenneth Jacobs.

"Antitrust was a concern during the Obama administration, and I think it's going to stay on peoples' minds," Jacobs said.

Stock market volatility, which was dormant in 2017 but roared back to life in the first quarter of this year, also has the potential to dampen M&A enthusiasm as it complicates deal planning and undercuts confidence.

But the markets handled the bouts of volatility well in the first quarter, Jacobs said.

"Most decision makers are more focused on the macroeconomic trends and environment than they are the daily moves of the stock market," he said.

Given the current trends driving dealmaking, M&A isn't likely to slow down any time soon, bank executives say.

"Other than a major shock to the system, I foresee the current M&A trends playing out for some time," Mahmoodzadegan said. "These are long-term forces, not short-term."

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