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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

Top M&A contenders for 2018

There is widespread expectation for mergers and acquisitions (M&As) to pick up pace in 2018. With markets flush with cash, record equity valuations and cheap debt, the environment is supportive for M&A at a time when firms are reshaping themselves for the digitised world. We take a look at which sectors are ripe, and the top contenders that could strike deals this year. 

Source: Bloomberg

Value of deals to rise to maintain record streak

Although the value of deals struck around the world dipped slightly in 2017, it was the fourth successive year that it remained above the $3 trillion mark, and the third straight year to see the volume of deals stay above 50,000. The consensus is unified in predicting an even better year in 2018.

The outlook was helped by high levels of activity in the final months of 2017, rounding off a year that saw major tie-ups in the US, UK and in cross-border deals. The likes of Amazon's $13.7 billion purchase of Whole Foods, Intel's $15 billion buy of Mobileye, and Johnson & Johnson's mega $31.3 billion acquisition of Actelion made headlines in the US. In the UK, investors saw Standard Life and Aberdeen Asset Management’s £11 billion merger create Standard Life, GVC Holdings launch a £3.9 billion offer for Ladbrokes Coral, and Tesco seal its £3.7 billion takeover of Booker Group.

There was also plenty of international deals, best demonstrated by mergers between Reckitt Benckiser and Mead Johnson, British American Tobacco and Reynolds American, and Vantiv and WorldPay.

Bull markets flush with cash turn to M&A after improving returns

US and UK markets reached new highs in the first week of 2018 and cash piles have grown, with firms under pressure to deploy funds or face returning it to investors. While last year saw a step-up in returns, companies have earmarked M&A as their number one priority for cash reserves this year as they stray further away from organic growth. This will result in intensified competition between companies looking to make strategic acquisitions and private equity, which raised more capital in 2017 than any other year since the financial crisis.

The success of M&A deals has also improved, as companies look beyond the spreadsheet to analyse targets, with Deloitte recently reporting, for example, that only 12% of US businesses said their M&A deals were underperforming in 2017, compared to nearly 40% in the spring of 2016.

Turning inward in a globalised world

Amid the likes of Brexit, and President Donald Trump’s plan to bring companies back to the US through the biggest tax overhaul in a generation, the business world that has been built on globalisation seems to be locked in a battle against governments that are increasingly turning inward.

Just as China said it was opening up its doors last October, following concerns too much money was leaving the country following record outward cross-border deals in 2016, the US started closing its own doors by trying to lure US companies back home and taking a harder line on foreign firms eyeing US businesses.

Last year, US regulators blocked several deals to stop US firms falling into the hands of the Chinese, citing national security concerns. This included China Capital Fund Corporation’s attempt to buy Lattice Semiconductor Corporation and the planned purchase of MoneyGram International by a company owned by Jack Ma, the executive chairman of Chinese e-commerce giant Alibaba. In fact, the overall amount of investments made by China (and certain other countries) that are being reviewed in both the US and UK has increased markedly in recent years.

While uncertainty still looms, the prospect of the EU and UK striking a deal has improved since a year ago, and Trump’s tax reform was passed to mark his first big legislative win, painting a rosier picture than at the start of 2017.

Bricks vs clicks: technology is driving convergence

While several sectors are still being consolidated, and vertical integration continues to grow in importance, the key driver of M&A activity is technology. Companies are continuing to pursue deals to scale up and expand geographically as they have done in the past. But the driver of M&A is shifting more toward the need for businesses to tackle disruptive technological trends and the need to adopt new strategies to spur growth, and make their business models fit for the digital era.

In the US, acquiring technology is the primary reason firms will undertake M&A this year, in order to help bolster their digital strategies. Followed by the more traditional reasons of expanding customer bases, adding new products and services, and securing talent, according to Deloitte. Only a fraction of firms are eyeing deals based on bargain prices or the need to expand geographically.

Disruptive innovation has led to increased convergence in numerous sectors, and pressure has heightened as major players such as Facebook, Apple, Amazon, Netflix and Alphabet’s Google flex their muscles to aggressively grow into new areas inorganically. This has been demonstrated by the likes of Amazon’s foray into the food and retail space with its takeover of Whole Foods to bolster its physical presence – with talks that Target could be the next retailer in its crosshairs.

The sectors converging is broad. Retail, financial services and telecom sectors are three of the largest areas thought to link up with tech firms going forward. Other sectors converging include energy and construction, construction and manufacturing, and life sciences and healthcare. Private equity, asset management, insurance, real estate, and banking are also seen as highly likely to experience convergence.

While there are still swathes of bricks-and-mortar businesses with little tech to boast, and a myriad of tech firms with barely an office to brag about, bricks and clicks are increasingly fusing together.

Read more about the 'FANG' shares here.

Unfinished business

The biggest ‘non-deal’ from last year is still in limbo as Broadcom continues to pursue its hostile bid for rival microchip maker Qualcomm. The $130 billion tie-up would be the biggest ever in the tech space. While Qualcomm has rejected the offer, as it believes the valuation is too low and fear that regulators would block such a move, Broadcom has pushed ahead and has even proposed appointing 11 new directors to Qualcomm’s board. In a recent twist, reports have surfaced that the European Commission is set to approve a separate major deal for Qualcomm to buy Dutch firm NXP Semiconductor (NXP) for around $47 billion. Broadcom has said it would buy Qualcomm with or without NXP, but Broadcom has a lower chance of securing regulatory approval if Qualcomm is successful. Watch this space.

Other deals expected to close in 2018 include Campbell Soup's $4.9 billion takeover of Kettle chip maker, Synder-Lance, Apple’s $400 million deal for sound recognition app Shazam, and GVC’s third attempt to buy Ladbrokes Coral, which is expected to be more fruitful this time around. Keep an eye out for progress regarding office provider, IWG, which was approached in December by two Canadian private equity firms.

And plenty of deals have already emerged this year

Possible deals that have emerged in the first two weeks of 2018 include reports that Italy’s Ferrero is to spend $2.8 billion on Nestle's US confectionary arm. That coincides with Nestle’s $2.3 billion deal for Canadian vitamin maker, Atrium, which should close in early 2018. Camera firm GoPro has put up a ‘for sale’ sign after a recent sales warning, and German utility, E.ON, agreed to sell a stake in Finnish rival Fortum for €3.8 billion. In healthcare and pharmaceuticals, there has been the €3.1 billion bid made by the world’s largest insulin maker, Novo Nordisk, for Belgian biotech firm Ablynx, and Celgene's bid for Impact Biomedicines, which could be valued anywhere between €1.1 billion to €6.9 billion.

Break-ups and spin-offs

A slew of big names are rumoured to be considering a break-up of their businesses, with some leading to new initial public offering (IPOs). There has been whispers that Irish drug maker, Shire, could pair up with US peer, Pfizer, but focus has turned to the more likely event that Shire could spin-off its ADHD arm which has been valued as much as $14 billion.

Eli Lilly has also confirmed it is looking to sell or spin-off Elanco, its animal health division, with estimated valuations stretching from $15 billion to as much as $20 billion. That follows on from Pfizer stating it was looking to do the same for its consumer healthcare unit, worth around $14 billion.

Allergan has also been identified as prime for a break-up following a tough 2017 that knocked its shares, but CEO, Brent Saunders, has said that is not the focus ‘right now’, and that any split would take ‘at least a few years of work’.

John Flannery, who took over as CEO of General Electric last year, outlined plans to make a ‘smaller, simpler’ company by offloading $20 billion worth of assets, including its two old units focused on lighting and rail, and possibly divesting from its 62.5% stake in oilfield services firm Baker Hughes.

Soon after DowDuPont was created last year, through the $156 billion merger of Dow Chemical and DuPont, the company unveiled plans to break the business up; one making plastic and materials, another agricultural chemicals and seeds, and a third focused on specialist products.

Honeywell International is reportedly planning to spin-off its non-core assets to create at least two new publicly-listed companies. Its turbochargers business, that creates automotive components, is anticipated to be one of those new firms, with the entire plan set to raise several billion dollars in proceeds.

Whitbread is continuing to face calls from some shareholders to break up its business, with its two main brands – Costa Coffee and Premier Inn – at the centre of the case. The long-running argument that life insurer Prudential should offload its mature UK business to focus on the growing Asian region will persist, and there is still potential for the world’s largest miner, BHP Billiton, to sell or spin-off its US shale oil and gas business that could be valued over $10 billion, with reports that a decision is to be made in the early stages of 2018.

Read more about upcoming IPOs for 2018 here.

Regulator’s headache over manic media M&A

It started last year when 21st Century Fox bid for the rest of TV and broadband provider Sky that it does not already own, but the tale has since taken a twist as Walt Disney placed a $66 billion offer for the majority of Fox’s entertainment assets. Fox’s £11.7 billion bid for Sky is already under intense scrutiny in the UK over fears about media plurality, but regulators are expected to make a decision on that before US counterparts rule on the Disney-Fox deal.

Disney has its eyes on Fox’s film studio and its 39% stake in Sky, while the likes of News Corp, the Fox News channel and its studio production facility in Los Angeles will be spun-off to Fox shareholders.

The fourth company in this manifold of media firms is TV and film streaming site Hulu, with Disney to take Fox’s 30% stake in the firm under the deal to become Hulu’s controlling shareholder. That coincides with speculation that Apple is mulling a bid for the industry leader Netflix, and comes as the US government tries to block the $85 billion mega-merger between AT&T and Time Warner, which remain determined to see the deal through. To throw in another spanner, Time Warner is a shareholder in Hulu.

Other M&A contenders

Following knocks from the loss of a franchise from Disney, and the collapse of Toys ‘R’ Us, Barbie-owner Mattel is thought to have caught the eye of larger peer Hasbro. Bookmaker, William Hill, has been touted as a target for private equity firms amid the GVC-Ladbrokes deal.

The food and drink space could also throw up some surprises. Beer brewer, Anheuser-Busch InBev, has long been linked with spirits seller Diageo, and speculation continues to circulate that Diageo could be looking at Molson Coors and UK mixer company, Fevertree Drinks. Meanwhile, talks between Birds Eye-owner, Pinnacle Foods, and ConAgra Foods could restart after merger talks collapsed last year.

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