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Merger and Acquisition Climate is Promising – Especially in the U.S.
We think the U.S. has a marginally more favorable climate for deals, based on our expectation of better economic conditions, lower tax rates, repatriation and less regulatory oversight. A strong equity market in the U.S. is a good currency, too. Rising rates certainly add a little pressure, but we think better growth prospects and the other factors we mentioned earlier are important enough to keep the trend strong. We could see U.S. companies buying other U.S. firms or buying foreign firms. Naturally, this is a broad generalization, as many multinationals based outside the U.S. also have acquisition appetites.
In terms of sectors, we think health care and technology are areas with important activity. In tech, we expect industry trends to drive consolidation in subsectors such as semiconductors and software. Big pharma in general have a need to fill pipelines, and promising biotechnology can be attractive targets. Sector predictions are tricky, however. One catalyst for mergers and acquisitions (M&A) is competitive response to other deals. Therefore, we may see a sequence of deals in an unexpected area, simply in response to similar acquisitions.
In terms of the mix between property plant and equipment (PP&E) and M&A, the question comes up in industrials, where we’ve seen a reluctance to invest, but a decent amount of M&A. We think PP&E spending picks up this year, but not at the expense of M&A. Most of the deals will be to add markets or specific products or intellectual property. Capital expenditures will be to expand or modernize facilities. We do not think these two need to be mutually exclusive, as long as returns on the projects are attractive and capital markets remain robust, as they are now.
For more equity insights, visit our Global Sector Views and quarterly Ski Report Equity Outlook .
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