Trade tariffs and the direction of the economy, coupled with concerns about the 2020 U.S. presidential election, weighed down expectations for mergers and acquisitions next year.
Just one-third of the advisers and senior business executives surveyed in an annual outlook from law firm Dykema Gossett PLLC said they were bullish and believe the M&A market will strengthen in 2020.
That’s about half the rate of respondents a year ago who felt optimistic about M&A activity heading into 2019. Sentiment at that time remained high over a lingering “jubilation” from the federal tax cuts enacted at the end of 2017, according to Dykema.
Sentiments expressed in this year’s survey were split relatively evenly, as another 32 percent of respondents said they were negative on M&A next year and 36 percent were neutral.
More than four out of 10 respondents this year cited trade tensions with China as the greatest challenge to M&A in the next 12 months, and 35 percent listed U.S. political uncertainty as the top challenge.
“Given all the recession talk in the last few months, the level of pessimism isn’t really very high,” said Stephen Sayre, co-leader of Chicago-based Dykema’s M&A practice. “There are clearly concerns about trade tensions with China and U.S. political uncertainty — especially with a presidential election next year — but with consumer confidence still relatively high and the U.S. economy looking fundamentally strong, there’s no sense that the sky is falling.”
Each fall, Dykema surveys M&A advisers and executives to gauge the market for the coming year. Automotive, health care, energy, consumer products, and technology ranked as the expected top industries for M&A in 2020.
Results showing respondents evenly split between positive, negative and neutral in their outlook for 2020 M&A activity was a first in the 15 years the law firm has conducted the survey, said Tom Vaughn, co-leader of Dykema’s M&A practice who is based in Detroit.
The results illustrate the pervasive uncertainty for 2020 stemming from the election and concerns about the economy, he said.
“We’ve never had it where people were pretty evenly split. Either they’ve been very positive or they’ve been very negative, or they’ve been very neutral,” Vaughn said. “What it says to me is there is a lot of uncertainty out there as to what’s coming, both in M&A and for the economy, and the outlook depends on who you ask. We had some people who were very positive about the future and some who were very negative.”
Despite a jump in negative outlooks for 2020, the 33 percent of respondents who remained optimistic provided “still a very positive outlook,” Vaughn said.
In Michigan, respondents were a little less optimistic about M&A activity next year with 58 percent taking a neutral view, 30 percent expecting the market to weaken and 12 percent expecting it to strengthen, Vaughn said.
The overall survey results also show an emerging economic pessimism for the next 12 months. Only 38 percent of respondents felt positive about the U.S. economy as 2019 begins to wind down, versus 64 percent a year ago and 60 percent in Dykema’s 2017 survey.
One-third of respondents said U.S. economic conditions will drive M&A activity next year. That displaced the availability of capital, which had been the leading driver for M&A for six straight years.
‘Sitting on the sidelines’
In the Dykema survey, half of the respondents nationally and 58 percent of respondents in Michigan expect a recession in the next 12 months, according to Vaughn.
That fits with expectations in other economic outlooks that generally expect growth in the U.S. economy to continue to ease through 2020.
Given the uncertainty in the economy and the effects of the presidential election that’s now less than a year away, Vaughn expects that some buyers may pull back from M&A in 2020.
“People are somewhat sitting on the sidelines because of the political uncertainty, waiting to see what the outcome may be,” he said. “We definitely saw that in a number of responses. People indicated because of the political uncertainty, they were holding and they were not making deals, waiting to see what the future might hold.
“There is some historical support for the idea that some dealmakers, when there is much uncertainty in the political environment, do wait and let that play out before they act.”
Among survey respondents, 38 percent said the 2020 election would have a negative effect on M&A in the U.S.
Dykema’s survey did point out that M&A activity so far in 2019 has been “relatively strong by historical standards.”
A recent quarterly update from Pitchbook on the North American M&A market reported continued “robust” deal flow in the third quarter, with transactions totaling more than $600 billion. Through the third quarter, Pitchbook counted 8,120 deals in North America for a total value of $1.59 trillion.
The North American market was on pace to record more than $2 trillion in deals in 2019. If the pace holds, 2019 would become the fourth year of the last five years in which deal values exceeded the $2 trillion threshold, according to Pitchbook.
Pitchbook did note that economic uncertainty was affecting the overall market and that there were fewer massive deals valued at $10 billion or more in the third quarter compared to prior quarters.
Among small businesses nationally, the online marketplace BizBuySell.com reported last month that its transactions declined 8.6 percent in the third quarter, continuing a trend seen throughout 2019 after a record-high pace in 2018.