HOUSTON, January 15, 2019 – Looking at the year ahead, Baker Botts’ Corporate partners share their insights on M&A, Investment, Private Equity, and Financing.

M&A Outlook

Brian Lee, Palo Alto based Corporate Partner
2019 will be another year governed by uncertainty and we will start to see increased effects as additional signs signal a potential downturn in the market. We believe the first half of the year will start out strong but as the year progresses activity will be slowed by underlying economic issues. We will continue to see an influx of international buyers that will continue to present a host of regulatory issues. This is particularly true in the life sciences sector where we expect to see an increase in activity as the industry continues to grow at a much faster pace than others.

Joshua Davidson, Houston based Corporate Partner
As we saw several years ago, low energy prices might make for reluctant sellers as they wait for higher prices again. Stock market volatility is not good for deal making either, as it makes it harder to peg values. That said, we do expect further consolidation in the energy industry given the need for efficiencies and deleveraging and the challenges of a maturing shale industry. Also, although most of the obvious MLP simplifications have occurred, there are several more that could occur in 2019 and there is likely to be consolidation among some of the smaller, PE-owned MLPs.

Investment Outlook

Brian Lee, Palo Alto based Corporate Partner
In a similar fashion to M&A activity, we expect to see an increase in the number of international investors in startups. Traditional VCs will remain strong, but the financial mix will continue to diversify as more high-net-worth individuals get involved and fundraising activities like crowdsourcing increase. We expect valuations to level off in 2019, but as this happens there will be fewer and fewer companies that everyone wants to invest in, resulting in further increased valuations for a lucky few. As valuations level, we will certainly see a number of fire sales and down rounds.

PE Outlook

Ed Rhyne, Houston based Corporate Partner
Leveraged buyout funds are holding a record amount of approximately $630 billion in dry powder. In other words, the PE industry is poised for another strong year of investment activity, assuming there is an adequate supply of target companies at manageable valuations. With the abundance of available funds for investments, the standard practice of selling target companies in auctions and the increasing popularity of representation and warranty insurance to minimize the post-closing risks to sellers, it is becoming very difficult for PE firms to differentiate themselves in all-cash M&A transactions. However, the firms with the most experience and expertise in the industries in which their companies operate should be best positioned to achieve their investment objectives, even with companies that are acquired at higher than desired investment valuations.

Larry Hall, Dallas based Corporate Partner
Upstream transaction activity in 2018 was far from robust. If transaction activity picks up in 2019, upstream private equity funds will seek opportunities to monetize or otherwise exit older investments. Larger upstream and midstream private equity funds may focus on fewer management teams with larger capital commitments, in order to pursue sizable property packages/projects and take advantage of scale (both at the fund and portfolio levels), which could open up more opportunities for smaller upstream and midstream private equity funds.

Financing Outlook

Rachael Lichman, Houston based Corporate Partner, and Erin Hopkins, Houston based Global Projects Partner
The biggest challenges continue to be a choppy market overall and particularly for any company reliant on the oil & gas space. We continue to see consolidation in the midstream space, with more MLP simplifications, and the offshore space. The bank market is still open, but terms are tighter and there is more focus on collateral and other structural enhancements, like priority guarantees. The built-up inertia in upstream exploration and production will continue to drive needed infrastructure improvements/additions in the coming year. Oil price volatility continues to be problematic on asset transactions and unless the price settles we expect a “calmer” asset deal market in 2019. However, this is a perfect time for larger strategic players to acquire assets and infrastructure and we are seeing more activity from the large strategic companies on this front. We also anticipate more public M&A activity as a way for companies to acquire and diversify in lieu of the more typical upstream asset-based transactions.

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