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  • 2017 was a bumper year for mergers and acquisitions,
    but 2018 could be even bigger.
  • Several factors will continue to drive M&A in 2018,
    including global economic expansion and US corporate tax
    reform, according to a report by Citigroup. 
  • An increase in activist investing could scuttle deals,
    however.

2017 finished off as a robust year for mergers and acquisitions,
with $3.7 trillion in deals — the third-highest annual tally
since the financial crisis.
Megadeals over $10 billion
soared in the second half of the
year. 

But 2017’s impressive run could just be a prelude to an even
frothier deal environment in 2018. 

“The market reaction to these deals was positive in 2017,
highlighting the benefits of accelerating growth, improving
technological capabilities, and broader geographic reach. These
benefits will continue to drive M&A into 2018 with several
evolving themes,” Citigroup’s corporate finance team wrote in a
2018 outlook report to its clients.  

Multiple trends — including an influx of corporate cash from tax
reform — are aligning that could make it a monster year for
M&A, according to Citi.

Here are some of the factors driving M&A enthusiasm:

  • Economic strength across the globe. “In 2018,
    75% of major economies are expected to generate more than 2%
    GDP growth, compared to only 57% in 2011,” Citi writes.
    “Aggregate corporate earnings are expected to rise by 10.1% in
    2018, up from 7.0% in 2016.”
  • The Amazon effect is lingering in corporate
    boardrooms.
    “Rapid technological change is requiring
    companies to think unconventionally about the types of deals
    that are necessary to adapt to changing demographics, consumer
    behavior, and technological innovation,” Citi writes. The
    report continued: “More firms are exploring transactions that
    blur traditional sector boundaries to create shareholder
    value.”
  • US corporate tax reform will provide cash flexibility
    for acquisitions.
    “The domestic provisions of the tax
    reform result in an estimated annual 12% increase in cash flow
    for the median U.S. firm which, over a five-year period,
    creates 0.5x incremental leverage capacity,” Citi writes.
  • The repatriation of offshore profits could provide a
    boost, too
    . “The top 15 firms have more than $10
    billion each and the next 20 have over $5 billion each. While
    access to this cash provides immediate dry powder for
    additional M&A, many of these firms already have
    significant financial flexibility,” Citi writes. 
  • Companies are already chasing growth — Federal Reserve
    action will likely heighten that dynamic.
    Citi expects
    the anticipated rate hikes from the Fed to further flatten the
    yield curve — the phenomena in which short- and long-term bonds
    start providing similar returns — pushing investors toward
    growth stocks. “As central bank unwinding continues, we
    expect an ongoing equity market premium for growth, requiring
    companies to remain focused on organic and M&A-driven
    growth initiatives,” Citi writes. 

One theme that could scuttle deals that’s worth a mention: a
marked increase in activist investing. Citi notes that
roughly 8% of US M&A deals and 4% in Europe now face
opposition from activists.

“Activist interference can be highly disruptive; almost one third
of deals with activist interference were not completed,” Citi
writes, referencing 2017 figures. 

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