Global investment banks' deal advisory fees plummeted in the first half of 2019 as deal-making activity hit record lows, recent data shows, with investors increasingly worried about trade and the global economy.

The global value of announced mergers and acquisitions fell 12% year over year to $2 trillion over the first half of 2019, while the number of deals slid 16% to a five-year low of 16,233, according to financial markets intelligence provider Refinitiv.

The negative M&A activity trends over the first half were visible in investment bank earnings with M&A advisory fees dropping 14% year over year to $13.6 billion, with declines recorded across all major regions, the data shows.

The slowdown was not surprising given geopolitical and economic issues. Weaker global growth, the U.S.-China trade dispute, and Brexit all took a toll on deal-makers' confidence, according to market observers. Nevertheless, there are "glimmers of hope" for the rest of the year as investors are still keen on seizing opportunities despite the more challenging landscape, the experts said.

"While deal values and volumes are trending downwards in most regions and sectors, investors are still willing to set political and regulatory uncertainty aside to execute big, strategic transactions," London-headquartered law firm Allen & Overy said in its latest global M&A Outlook report.

The first-half volume and value declines are disappointing but the number of high-value deals in the period indicates investor appetite has not diminished, which could lead to an improvement over the second half, Claude-Vincent Gillard, managing director, data and partnerships at analytics company Bureau van Dijk, said in a recent market review. "[T]here is every chance we could see an upturn in activity levels as we move towards December," he said.

Despite the drop in global M&A activity, there was a surge in megadeals, which are transactions valued at more than $10 billion, according to Dealogic, a research firm based in London. The share of megadeals in first-half global deals was 40.6%, hitting a record high both in terms of value and volume. This was on the back of a decline in deals valued between $1 billion to $10 billion, which accounted for just 32% of the first-half total, the lowest volume for this period of the year on record, Dealogic said.

Global M&A trends down

A major withdrawal by Chinese investors, amid home economy woes and the trade tensions with the U.S., was among the key drivers for the drop in global activity. Chinese investment in mergers and acquisitions more than halved over the first six months of 2019, dropping to the lowest activity level since 2014. The steepest drop in Chinese outbound investments was to the U.S.

"Uncertainty about a possible trade war with China is a particular challenge for deal-makers attempting to build a medium-to-long-term business case for transactions," U.S. law firm White & Case said in its analysis of first half U.S. M&A.

The negative effects of the trade tensions can be seen on both sides given the "significant slowdown" in outbound M&A by U.S. companies seen during the first half, White & Case said. The number of outbound U.S. deals fell 22% year over year to 551 and values fell 4% to $191.2 billion, the firm said.

The slowdown in outbound activity was observed across all regions with double-digit declines in deal value and volume almost everywhere, according to estimates from global law firm Hogan Lovells, based on Refinitiv data.

Overall cross-border M&A — a major growth driver of global activity — hit a six-year low. The value of cross-border M&A deals amounted to $509 billion in the first half of 2019, down 45% year over year and the lowest first half value since 2013, Refinitiv data shows.

Risks and opportunities

Despite the challenging first half, the situation can still improve by the end of the year as there are still large-scale transactions in the pipeline and the investment withdrawal from some regions could create opportunities in others, according to market observers.

Chinese investment may be pulling back from the U.S., but Europe and the rest of Asia remain interesting, so a complete drying up of China-originated M&A is unlikely, Octavio Marenzi, CEO of investment firm Opimas, said in an interview.

While the trade tensions with the U.S. continue, Chinese companies are expected to look more closely at Europe and there could also be renewed interest in U.K. assets, Don McGown, a London-based partner at Hogan Lovells said in an emailed comment. This is good news for the U.K., where M&A activity has slowed ahead of its departure from the European Union at the end of October.

Indeed, the U.K. attracted the largest number of China-originated M&A in Europe in the first half of 2019, according to recent data from Ernst & Young.

Despite the raw first half data pointing to M&A activity declines, "there is plenty of evidence that companies are prepared to take on big strategic deals when opportunities arise," Allen & Overy said. "The search for growth and digitalization continue to be two powerful drivers of deals and companies remain global in their outlook even at a time of growing protectionism," the firm said.

There are opportunities even in an economic downturn. If there is a downturn, there will be a different kind of acquisition activity, which is geared more toward consolidation within sectors rather than looking to expand to new areas, Marenzi said. Although the nature of M&A would change, volumes should come back at a certain point, he said.

Profound changes in the global economy will not necessarily be bad for M&A deals, Allen & Overy noted in its analysis. "Indeed, change can itself be a powerful catalyst for transformational transactios."

One key trend that all market observers note is that investors are becoming more selective. "Greater scrutiny of deals — both from shareholders and regulators —will lead companies to be more wary of deals which have challenging antitrust or national security aspects," McGown said.

Tighter merger controls imposed by U.S. and EU regulators should lead to greater deal complexity, and investors are increasingly aware of that, Allen & Overy said.