• M&A globally to stay flat at $2.9 trn down from $3.1 trn this year
  • Domestic IPOs up to $164bn
  • Slow down in Europe, while US and Asia stay on track
  • Threats to free trade and investment flows biggest concerns

Cooling macro economic drivers will mean that  transaction activity next year will be marginally down on 2018 pulled back by weaker European markets reveals the fourth Global Transactions Forecast issued by Baker McKenzie and Oxford Economics (OE).

The report, based on forecast macro economic indicators from OE along with insights from Baker McKenzie partners in 42 markets worldwide, projects that 2019 is likely to be a year of two halves. Several major transactions announced in 2018 are set to complete in the first half of 2019, while underlying economic conditions should remain strong throughout this period.  However, macro drivers will cool the market through the latter half of next year.

The forecast predicts M&A value at $2.9trn for 2019 - down from $3.1trn this year - before falling to $2.3trn in 2020. With some major IPOs scheduled for 2019, we foresee total proceeds at $232bn - up from $220bn in 2018 - before dropping to $154bn in 2020. In 2021 and beyond, with borrowing costs settling at their 'neutral' rates and equity markets enjoying better growth, we see the potential for the start of a new upturn in both M&A and IPOs.

Paul Rawlinson Global Chair of Baker McKenzie comments: "We remain cautiously optimistic about the year ahead, as we believe dealmakers will continue to take the long view in a world where sitting on your hands and waiting for the volatility to die down is not an option. However as we identified 12 months ago there are still real threats to free trade and investment flows and there remains potential for a much more serious outbreak of protectionism and isolation that business, regulators and government must try and guard against."

By region

Across the globe the forecast predicts a mixed picture. Overall another strong year is anticipated in North America 2019, particularly if trade talks become less contentious and partisan. However with US interest rates on their way back up towards a neutral level, and limited scope for further cyclical growth in the economy, the second half of 2019 will see less activity than the first.

With the Eurozone economy now entering a cyclical slowdown, the forecast suggests a further reduction in deal activity in 2019, although in selected European economies including Spain and the UK, the market has remained robust and prospects for 2019 look fair – especially if and it's a big if, Brexit is managed relatively smoothly.

In Asia Pacific we anticipate much of the momentum this year will be maintained into 2019 despite slower world trade growth, which is key for many economies in the region. Globally emerging markets look less vulnerable to rising Fed rates than in the past, meaning US monetary policy will drag less on Asia-Pacific dealmaking in 2019 than during previous cycles. And in LatAm we are seeing more interest from investors in long term opportunities. With new governments taking office in Brazil and Mexico, and the expected resolution of NAFTA uncertainty, we expect stronger dealmaking activity in the next couple of years.

A recovery in oil prices has helped economies in the Middle East and Africa through 2018, although the global oil market has become more volatile as we head into 2019. In the Middle East, continued gradual progress towards more-diversified economies should help build confidence and dealmaking from 2019 onwards, while in Africa signs of financial and economic stability will do likewise.

Ai Ai Wong, Global Transactions leader, Baker McKenzie says: "We are predicting a modest slow down next year but we think that global business, particularly in the emerging markets is in pretty good shape to deal with any economic upsets. The fundamentals for deal making remain strong"

M&A in 2019

In last year’s forecast we anticipated an acceleration in M&A dealmaking in 2018, as a range of positive economic factors underpinned confidence before a slowdown in 2019. This picture has largely been borne out. However, some of the activity we had pencilled in for 2018 has been pushed back into 2019 - particularly a slew of megadeals that have been announced but are yet to complete. Our forecast is for global M&A volumes of $2.9trn in 2019.

With the world economy cooling from  2019, however, we predict global M&A values will slip back to $2.3trn in 2020. As we move into 2021, we will see more stabilisation after a period of adjustments: interest rates should have reached a stable level in the US; equity markets will be in a more sustainable position and, barring further escalation in trade tensions in the meantime, companies will have more certainty about their ability to trade across borders. As such, our analysis of key macro drivers - and the historical pattern of M&A cycles - suggests a new upcycle could begin in 2021.

Michael DeFranco, Global Head of M&A, Baker McKenzie says, "We remain cautiously optimistic about the environment for M&A in the years ahead. Further consolidation remains inevitable in many markets and across many sectors that a few macro economic bumps in the road might delay but won't postpone. We see some softening in 2020 but again a cyclical recovery further out. Good businesses will always be on the look out for new opportunities."

The IPO market in 2019

The forecast predicts solid growth in the domestic IPO market in 2019 in North America, Asia-Pacific and Latin America with global deal values set to increase from $151bn to $164bn with a number of flagship issues coming to market.  Thereafter, IPOs take a temporary pause in 2020, as potential issuers wait for the adjustment in equity markets to finish.

Cross border IPOs surged in 2018 with both the US and Hong Kong markets particularly buoyant, and we forecast that momentum to continue next year. We anticipate that the total of $68bn for this year will be matched next, driven by increased overseas listings by Chinese tech firms. However we expect a modest slow down in 2020 cooling in line with global equity markets, before a partial rebound the following year.

Koen Vanhaerents, Head of Baker McKenzie's Global Capital Markets Practice Group says, "We've seen a pretty mixed range of IPO activity this year with a  strong performance in certain markets like the US and Hong Kong being balanced by weaker numbers in Europe as the Continent has struggled with Brexit uncertainties. We expect a similar picture next year but overall remain optimistic there are significant opportunities out there."

And by sector

Consumer-facing sectors are likely again to have a strong year in 2019 as accelerating wage growth in advanced economies will boost household spending in 2019. Similarly tech and telecoms should have another good year with some key megadeals set for completion.

Pharma and health deal completions have disappointed in 2018. However, with a number of significant deals announced later this year we forecast a modest acceleration into 2019. Likewise, in the finance sector, where deal values cooled in 2018, scope remains for consolidation, and traditional banks’ desire to access Fintech will also drive growth.

Finally, a rebounding oil price has likely eased the need for further consolidation in the energy sector, and we expect this industry to continue to ebb as a deal driver. But the basic materials sector has been more active, and there is evidence that new metals and minerals (such as those used in electric vehicles) will be key resources driving dealmaking in the year ahead.

In conclusion

Ai Ai concludes: "Business has become more immune over time to global macro uncertainty and have learnt to live with volatility. Even with a cooling global economy and rising protectionism we remain confident that the environment and appetite for deal making remains strong among corporates wherever they are in the world."

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