MoFo Survey: Dealmakers Offer Brightest M&A Forecast in Four Years

Tax changes help fuel positive sentiment for deal activity, though there are concerns about increased scrutiny from CFIUS and trade disputes

05/02/2018

Chuan Sun

China and Mergers + Acquisitions

MoFo News Item

SAN FRANCISCO (May 2, 2018) – Morrison & Foerster, a leading global law firm, today announced the results of its semi-annual Tech M&A Leaders’ Survey, in which dealmakers offered their most positive forecast for tech M&A in four years. Despite a slow start to 2018, two-thirds (66%) of survey respondents expect an increase in deal volume, the highest level since April 2014.

The report found that 65% of survey respondents believe the Tax Cuts and Jobs Act of 2017 will ultimately bolster overall dealmaking in 2018. This finding helps at least partially explain the discrepancy between dealmakers’ optimistic outlook and the number of tech deals through the first quarter of 2018 coming in at 815, the slowest start to a year since 2013 (source: 451 Research’s M&A KnowledgeBase). 

“It is clear that dealmakers remain bullish about the prospects for tech M&A this year,” said Robert Townsend, co-chair of Morrison & Foerster’s Global M&A Practice Group. “This rosy forecast from our survey respondents can be attributed to changes in U.S. tax law at the end of 2017. The majority of dealmakers clearly believe that lower corporate tax rates will free up cash for M&A while making target companies more attractive.”

Additional key findings, takeaways, and analysis from the Tech M&A Leaders’ Survey include:

Other government policies could negatively impact U.S. tech targets

Beyond taxes, other government initiatives could weigh on acquisitions of U.S. tech targets. Of particular note, the survey found that 54% of respondents believe increased scrutiny from the Committee on Foreign Investment in the United States (CFIUS) will deter dealmaking. Respondents provided their most dismal cross-border forecast for China-based buyers targeting U.S.-headquartered companies, with 65% of respondents expecting China-U.S. acquisitions to decline. According to the 451 Research M&A KnowledgeBase, the value of such deals fell in 2017 to just $500 million from $11.5 billion a year earlier.

Dealmakers are also worried about trade disputes, with 51% of survey respondents expecting the current dynamic to deter M&A activity. Similarly, 49% of respondents think antitrust concerns could negatively impact dealmaking.

“Chinese investors are understandably concerned about the potential trade disputes and increased CFIUS scrutiny,” said Chuan Sun, a partner in Morrison & Foerster’s China Outbound Group. “Although they remain interested in U.S. tech companies (in particular those in less sensitive areas), they have been cautious in making the U.S.-bound investment decisions.  Meanwhile, since last year we’ve witnessed a noticeable shift in Chinese investors’ short to medium term interests to non-U.S. targets, such as those in Southeast Asia, Israel and Europe.”

Outlook for Private Equity acquisitions remains high but dampens slightly

After Private Equity (PE) had its busiest ever first quarter according to 451 Research’s M&A KnowledgeBase, 47% of survey respondents expect there to be a continued increase in PE spending, compared with just 13% forecasting a decrease. Sentiment has, however, slightly dampened since the previous Tech M&A Leaders’ Survey was released in October 2017 when a clear majority of respondents (59%) expected PE spending to rise.

While slightly fewer dealmakers predict an increase in new PE acquisitions, more survey respondents forecast a smoother path to exit for portfolio companies as enterprises ramp up their shopping. Almost half (48%) expect a favorable exit environment for PE over the next three years, whereas in the previous survey, almost as many (45%) predicted an unfavorable environment. Sixty-four percent of respondents anticipate that sales to strategic acquirers will increase this year, second only to exits via IPO, for which 49% of dealmakers predict an increase.

Changes to U.S. tax laws are expected to be better for strategic M&A than Private Equity

Another factor accounting for the slightly dampened outlook for PE deals is the expected impact of the Tax Cuts and Jobs Act of 2017. Less than half of survey respondents (47%) expect the tax reforms to help increase PE deals, compared to 66% who expect it to boost corporate M&A and sponsored deals.

Furthermore, lower corporate tax rates could potentially decrease valuation sensitivity among M&A strategics and enable them to win deals from PE firms. Forty-six percent of survey respondents shared that outbidding from PE firms has been a strong factor in the decline of strategic M&A.

Outlook is optimistic for unicorn debuts

In the wake of successful IPOs from Dropbox, Spotify and Pivotal, more unicorn debuts are expected to follow. The survey found 48% of survey respondents expect that, on average, unicorns will end their first day of trading above their previous post-money valuations, while 43% expect they will fall. Additionally, 30% of overall respondents believe unicorns will finish their first session on the street up 10% or more from their private valuation, while just 19% predict they will decrease by that same level.

Find out more about the survey results.

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