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trader celebrationReuters / Paulo Whitaker

  • US merger and acquisition activity is on pace to clear $1 trillion for the fourth year in a row.
  • Robert W. Baird sees robust activity continuing through 2018 as private equity-backed companies grow in number and outbound Chinese investment remains strong.

2017 has been a banner year for merger and acquisition activity.

Broadcom is trying to buy Qualcomm for more than $100 billion, which would be the biggest tech takeover in history. United Technologies agreed to fork over $30 billion for Rockwell Collins back in September. And just this week, Roark Capital, which owns Arby’s, said it will buy Buffalo Wild Wings for about $2.9 billion.

The glut of activity has the US M&A market set to clear $1 trillion in total dollar value transacted this year, according to data compiled by Robert W. Baird. It would be the fourth straight year it cleared the threshold after six years spent trailing it.

Sounds great right? Well, the investment banking team at Baird says 2018 could be even better, for three main reasons:

1) The continued growth of private equity-backed companies

The number of private equity-backed companies in the US has surged by more than 30% from 2011 to 2017, growing every year, according to Baird data. The total number is now greater than 7,000.

This is meaningful activity because PE-backed companies are, by nature, more likely to be involved in M&A activity, says Baird. They can function as either buyers or sellers, depending on liquidity conditions and what their PE overlords have in mind for growing their businesses.

PE has also benefited greatly from accommodative lending conditions. With the Federal Reserve only just now starting to tighten its purse strings, firms have had access to loads of cheap capital they’ve then used on M&A activity. And even though the Fed is now tightening and preparing to unwind its massive balance sheet, it will be a gradual process that shouldn’t immediately disrupt debt-raising activities.

2) Strong Chinese buyer participation… in certain industries

While the Chinese government recently took measures to make it more difficult for native entities to do M&A overseas, Baird is confident that outbound deal volume will rebound in 2018. The firm cites its own anecdotal experience in sell-side processes, which suggests that Chinese buyers are still very interested. Still, they seem to have very specific sector preferences.

“We have seen multiple Chinese potential buyers meaningfully participate at high valuation levels, resulting in transactions to Chinese strategic and private equity buyers in the consumer, education and travel sectors,” the firm’s investment banking team wrote.

Further, Baird cites guidelines recently released by the Chinese government that suggest outbound M&A will be encouraged in cases when the opportunities are based on “sound fundamentals and solid strategic logic.”

3) Steep competition among buyers

One side effect of the aforementioned easy lending conditions is that lots of different companies and firms have a lot of money on hand. This drives competition in the M&A space, and leads to higher purchase prices.

Another consideration is that, at this point in the market cycle, some firms may be trying to insulate themselves from an inevitable rough patch.

High valuations will “continue in 2018 as both strategic buyers and PE firms compete for high-growth, mid-market companies and defensive business models that can withstand the next economic downturn, whenever it may be,” said Baird.

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