Deal making world-wide is set to plunge by 25% next year as the risk of a global recession hits confidence and the upcoming U.S. presidential election creates added uncertainty.
The value of M&A will decline globally from $2.8 trillion in 2019 to $2.1 trillion in 2020, according to a new report by international law firm Baker McKenzie.
“With mounting uncertainty facing the global economy, next year looks set for a deeper downturn in deal making activity than in 2019,” the law firm said in the fifth edition of its Global Transactions Forecast, published this week.
Escalating trade tensions between China and the U.S. will further exacerbate deal flow as will the slowing global economy. Global GDP growth is forecast to fall to around 2.5% this year, from 3.2% in 2018, marking the slowest year since the financial crisis of 2008-09.
North American M&A is expected to fall to $1.1 trillion in 2020 from $1.5 trillion in 2019. The market has already seen some big-ticket deals taken off the table. In September, Philip Morris International
abandoned their merger plans to create the world’s biggest tobacco company with combined sales of $200 billion after a lukewarm reception from investors.
“Investors are becoming concerned about high valuations and rising corporate leverage, and we’ve seen the market respond less-than-favourably to a number of large deal announcements recently,” said Michael DeFranco, global chair of Baker McKenzie’s M&A practice.
Europe will also see a decline in M&A linked to the U.K.’s potential exit from the European Union and a slowing German economy drags down the volume of deals to $427 billion in 2020 from $567 billion last year.
“There is notable decreased appetite for acquisition, and to make matters worse, European governments have increased regulatory scrutiny significantly in 2019,” the report noted.
The EU’s antitrust enforcer blocked the planned merger of the European steel businesses of India’s Tata Steel and Germany’s Thyssenkrupp
in June, saying the combination would reduce competition in the supply of special steel for the car and packaging industries. Four months earlier, it nixed the merger between the German and French train manufacturers Siemens
despite intense Franco-German lobbying.
The outlook isn’t gloomy for all investors, however. The volatile global market will be a boon for private equity as they deploy the record amount of capital they have amassed to pick up bargains. Private market funds globally have a $2.1tn cash pile to spend, according to data provider Preqin.
The global market for initial public offerings will continue to be sluggish. Proceeds from IPOs are forecast to drop by 23%, from an estimated $152 billion in 2019 to $116 billion in 2020.