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  • 2018 could be ”The Year of M&A”

    Financial Markets

    2017 was a good year, but not a great year, for global mergers and acquisition (M&A) activity as global M&A fell just short of 2016 results with a 3.2% decline in value according to Mergermarket. 2018, on the other hand, has started off great with a series of large M&A announcements. According to Thomson Reuters, there have been 11 transactions over $5 billion, totaling $94 billion thus far, making it the largest January total for deals over $5 billion on record – already! Furthermore, Bloomberg reported that 2018 has marked the best start for overall global M&A activity, with total volume of $224 billion thus far in January, since 2000. Some of the M&A transactions in January 2018 include:

    Source: Thomson Reuters Deals Intelligence as of January 22, 2018. Figures include both announced and completed transactions.

    So what is causing all of the heightened activity in the M&A space during the initial weeks of the New Year? From our perspective, there are a variety of reasons including, but not limited to, the following:

    • Business confidence and optimism
    • Excess cash on corporate balance sheets
    • Relative stability of U.S. and global economies
    • U.S. corporate tax cut from 35% to 21%
    • Repatriation provisions of recently enacted U.S. tax plan

    With respect to the last point above, the repatriation provisions of the new tax act will likely bring more cash back onto the balance sheets of certain U.S. multi-national companies. To this end, Apple recently announced plans to repatriate the vast majority of its $252 billion in cash held overseas. One potential use of any excess cash repatriated by U.S. corporations in general would be mergers and acquisitions and potential M&A targets may be in the areas of technology and biotechnology considering that technology and healthcare account for 85% of total S&P 500 untaxed cash overseas according to an Emily Stewart article on entitled, “20 Companies Goldman Sachs Thinks Will Be Huge Winners from Trump’s Big Tax Plan.”
    With respect to biotechnology, we believe that some larger pharmaceutical companies benefiting from repatriation may consider acquiring attractive biotech companies for some of the following reasons:

    • The continuation of the “patent cliff” where larger pharmaceutical companies have drugs scheduled to come off patent and be susceptible to generic competition

    • The lack of a pipeline at many of these affected larger pharmaceutical firms to replace revenues lost through either the patent cliff or drug price compression

    • The lengthy and expensive approval process for developing a new drug when compared to the acquisition of a developed drug that has either been approved or is near final Federal Drug Administration (FDA) approval

    With respect to technology, we believe that some larger information technology firms with excess cash on their balance sheets may start to look at acquiring attractive technology firms involved with more revolutionary technologies in areas such as financial technology (FinTech) for some of the following reasons:

    • Innovative nature of certain game changing technologies, largely impacting aspects of the financial industry, such as artificial intelligence (AI), cybersecurity and blockchain

    • The popularity of cryptocurrencies (at least as an investment option for now) and the recognition of the widespread application potential of the underlying blockchain technology that cryptocurrencies, such as Bitcoin, are built upon

    • Evolving online nature of the American economy and the needs and desires of certain demographics (ex. Millennials) of the American consumer

    It is also worth noting that any acquisition activity of smaller companies in 2018 may also help drive return potential in the small cap and –mid cap asset classes for the year. Time will tell if M&A activity will continue at the torrid pace that it is currently enjoying but it would not surprise us to ultimately see some year-end commentaries referring to 2018 as the “Year of M&A.”

    Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above. This article is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

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