New governments and uncertainty on trade impacted M&A activity in 2018
Regional M&A activity is expected to reach USD 94 billion next year
Further growth on M&A and IPO is forecasted for 2020
Latin America, 17 December 2018 - Following a downturn in 2018, M&A activity is expected to grow in Latin America next year and reach USD 94 billion, an increase of 13% compared to the estimated USD 83 billion total for 2018, according to the fourth Global Transactions Forecast issued by leading global law firm Baker McKenzie and Oxford Economics (OE).
The report, based on forecast macroeconomic 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.
In Latin America, the report anticipates there will be more interest from investors in long-term opportunities. With new governments in Brazil and Mexico, and the expected resolution of NAFTA, stronger deal making activity is anticipated for the next couple of years, with M&A in the region rising to USD 94 billion in 2019 and USD 98 billion in 2020.
According to the forecast, the domestic M&A downturn reflected the political and financial turmoil affecting individual firms’ finances as well as the broader economy. However, inbound M&A held up rather better, as did IPO activity, suggesting that particularly overseas investors are taking a longer view.
"Despite political and economic uncertainty, we continue seeing inbound M&A investments coming to Latin America, resulting in 70% of the activity coming from cross-border deals," says Liliana Espinosa, Latin America regional head of the M&A practice group at Baker McKenzie. "With an economic recovery expected in Brazil next year; Mexico clarifying its trade rules with North America; the CPTPP entering into effect this year; and growing investor confidence in Chile, Peru, and Colombia, we foresee an uptick in regional M&A activity in 2019".
Given the presidential election in Brazil, a rising stock market, and stronger real, it is expected that business confidence will recover somewhat in 2019, with total M&A activity reaching USD 46.8 billion next year, and growth rebounding even further in 2020.
In Mexico, deal making in 2018 has clearly been undermined by the uncertainty surrounding its relationships with the U.S. With the current understood agreement, which has only a limited impact on Mexico’s access to the US market, it is forecasted a rebound in 2019, as “pent-up” deals are executed.
In Colombia, markets responded well to the presidential election; the country's membership in the OECD; rising oil prices; and the rollout of an ambitious infrastructure program. These developments should further reinforce business confidence and deal making next year. However, these improvements in the fundamentals were too late to boost activity in 2018, when completed deals reached just USD 1.3 billion. We therefore expect to see a strong growth in total M&A activity next year, to just over USD 6 billion.
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 USD 151 billion to USD 164 billion with several flagship issues coming to market. Thereafter, IPOs are forecasted to take a temporary pause in 2020, as potential issuers wait for the adjustment in equity markets to finish.
Latin America’s two major IPO markets — Mexico and Brazil — fared reasonably well in 2018, especially considering the wider malaise in both economies. Given the expected improvement in economic and financial conditions in 2019, underlying prospects for IPO should improve. However, Mexico’s 2018 figure was boosted by the USD 1.8 billion listing of Grupo Aeroportuario de la Ciudad de Mexico SA de CV, so the pickup in aggregate proceeds may appear relatively modest. We forecast total domestic IPO to rise from USD 5.3 billion in 2018, to USD 6.5 billion in 2019, before cooling the following year.
Cooling macroeconomic drivers will mean that transaction activity next year will be marginally down on 2018 pulled back by weaker European markets.
The forecast predicts M&A value at USD 2.9 trillion for 2019 - down from USD 3.1 trillion this year - before falling to USD 2.3 trillion in 2020. With some major IPOs scheduled for 2019, we foresee total proceeds at USD 232 billion - up from USD 220 billion in 2018 - before dropping to USD 154 billion 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.
"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," concludes Ai Ai Wong, Global Transactions leader at Baker McKenzie.