M&A Outlook for Spring 2019; Q4 Transaction Report

We are in the first quarter of 2019 and deal data is now available through the end of the fourth quarter 2018. In this report, we review our region’s most active industry sectors and offer an outlook for Spring 2019.

M&A Transaction Report by Sector

I. Aerospace

2018 was the third highest year on record for aerospace deal value, despite the decline from year over year. The total number of deals over this period declined. Analysts believe the prospects for 2019 are positive .

  • Increasing scale and competitive capabilities are the primary drivers of acquisition activity.
  • The announced merger of Harris Corp and L3 Technologies impacted deal value in Q4 2018. This deal symbolizes the trend to strengthen R&D efforts and improve order turnaround through acquisition.
  • For the year, Electronic Equipment and Software and Security Systems are the two largest contributors to aerospace deal value. This investment underscores the growing interest in digital transformation and warfare capabilities. Analysts expect this trend to continue throughout 2019.
  • The Deal volume for the year was led by Arms and Vehicle and Aircraft and Parts.

II. Chemicals 

2018 was a robust year for Chemicals M&A activity. Lower corporate tax rates and access to capital helped to stabilize deal volume and mitigate the impact from trade disputes. Analysts expect another strong year in 2019.

  • 2018 was a strong year for chemical deal value, but Q4 saw a decline over Q3, primarily due to four large deals closing in Q3.
  • Specialty Chemicals dominated the year with 61% of deal value and 49% of deal volume. Commodity Chemicals was second for value (15%) and volume (29%).
  • Analysts expect deal activity likely to increase in the following areas of Chemicals: health and nutrition additives, coatings, adhesives, and specialty materials.

III. Construction and Engineering

Even with the remaining geopolitical uncertainty and strained trade relations, the underlying sector fundamentals remain positive for Construction and Engineering going into 2019.

  • The proposed infrastructure bill of $1.5 trillion currently has bipartisan support, another positive event on the horizon that could impact deal activity.
  • Civil Engineering led the quarter in deal value, with the Construction sub-sector leading quarter deal volume. Both of these sub-sectors led the year in deal value and volume, illustrating the current government’s increased infrastructure spending.
  • Analysts cite solid corporate balance sheets, demand for smart cities, record amounts of capital for investment, and healthy debt markets as support for upcoming M&A activity.

IV. Energy: Oil and Gas

In statistical terms, the value of oil and gas deals was very high throughout 2018, but this data is misleading. Numerous midstream limited partnerships were converting to C-corps, which registered as transaction activity. When you exclude these one-off tax-induced restructurings, deal value dipped below the three year average.

  • Upstream had the majority of deal volume, with many of the deals about increasing scale or presence surrounding existing acreage, with immediate impact on production and cash flow.
  • Shale played a major role in 2018 M&A activity and analysts anticipate it will remain a target for growing portfolios. The Permian led the year in shale related deal activity, many of the deals funded from divestitures in other non-core basins.
  • Analysts expect upstream and midstream trends to continue; downstream could increase in deal activity, while oilfield services deal outlook remains anemic. Commodity price volatility lingers and could lead to cautious deal-making in 2019.

V. Healthcare

Despite a decline in value, 2018 was a record-breaking year for the total number of completed transactions in Healthcare. Deal value declined year over year; however, this year-over-year change was largely attributable to the outsized CVS-Aetna deal in 2017.

  • Long-Term Care again led deal volume. With the Cigna Corporation and Express Scripts deal, the Other Services sub-sector led deal value.
  • Behavioral Care grew the most year over year in volume and value. The Hospitals sub-sector also experienced significant growth in deal value.
  • Deal activity is expected to continue due to capital availability, market disruption, and ongoing trends of reimbursement pressure, consumer focus, and regulatory uncertainty.

VI. Industrial Manufacturing

While analysts are cautious about the headwinds that remain for Industrial Manufacturing, they are also optimistic for deal activity in 2019.

  • Industrial Machinery led 2018 deal activity in value and volume, followed by Electronic and Electrical Equipment coming second in deal value and volume.
  • Industrial Manufacturing had a robust first half of 2018 with deal activity falling off the second half of the year, attributable to geopolitical tension and decreasing GDP concerns.
  • The sector has high levels of capital from financial investors and strategic investors with strong corporate balance sheets. Business leaders continue to realign their portfolios, leading to possible assets on the market in 2019.

VII. Transportation, Logistics, Distribution

Transportation, Logistics, and Distribution deal activity in the second half of 2018 was dampened by regulatory, trade, and economic uncertainty.

  • Logistics and Passenger Ground deals accounted for a little over half of all deal volume in 2018.
  • As far as deal value in 2018, growth in Passenger Air, Passenger Ground, and Logistics outweighed the decline in deal values in the Trucking and Shipping categories.
  • Moving into 2019, analysts have no reason to see a reversal of the decreased activity experienced over the last six months. However, once the uncertainty dissipates, M&A activity could be driven by the impact of technology in the industry, specifically the technological advances in consumer purchasing opportunities.

Sources: This report has been compiled from reports and research including federal data, independent analysis, Reuters, Janes Capital Partners, Kiplinger, PCE-Companies, Mergermarket, PricewaterhouseCoopers, and SDR Ventures.

Note: In the report, you will see that some of the deal data is for larger public companies. The most reliable and timely data tends to be for the larger companies in each industry; however, deal activity of the largest corporations is also a good barometer for M&A activity among midsized companies in the same industry.