Conditions are ripe for more M&&A action in 2018

The global economy, the U.S. economy and the U.S. manufacturing sector all enjoyed solid momentum heading into 2018. In addition to this, Congress recently passed major legislation on tax reform. The new tax laws not only appear to be pro-business, but perhaps more importantly, some of this nation's collective anxiety about gridlock in the nation's capital has been relieved because the president and congressional leaders finally accomplished something together.

As a result, the confidence levels for business owners, senior managers and private equity firms are presently quite high, and this means the time is ripe for making a deal. My forecast calls for a rise in the number of mergers and acquisitions in the plastics industry in 2018.

The trends in M&A activity are assessed using two metrics: the number of deals; and the size of the deals. I expect an increase in both of these metrics this year when compared with 2017.

I think the size of the M&A deals will increase this year because there is an enormous amount of unused cash sitting in the bank accounts of large private equity firms and corporations. This pool of underutilized funds will only increase once corporate tax rates are lowered and the funds belonging to multinational companies that are currently parked in overseas accounts are repatriated back to the United States.

These idle funds have been steadily accumulating for a number of years. For most of the current long and slow recovery cycle business leaders lacked the confidence that aggregate demand for goods and services in this country would rise fast enough to justify an increase in investment. Their money has not been generating any inflation-adjusted return by sitting in the bank, but doing nothing seemed preferable to putting capital at risk in a slow-growth environment.

This means that we have been in a prolonged period of underinvestment in America. This lack of investment has suppressed the rate of productivity gains, and this, coupled with slow population growth, has resulted in a long and slow recovery cycle. We have been trapped in a vicious cycle of slow investment gains and slow demand growth.

But things seem to be improving in 2018. The pace of growth in real GDP has been above-trend for the past two quarters, and the employment data continued to register strong gains. Wages are expected to expand by at least 3 percent this year, and the rate of inflation will finally escalate to 2 percent. These are strong indications that the pace of aggregate demand is rising.

And this rising demand, combined with the voluminous amount of underutilized capital, is a formula that will equate to an increase in the number of large deals this year that will affect the plastics industry.

The industries in which there will likely be some large deals include health care and medical devices consumer products and, of course, technology.

From the perspective of the plastics industry, the rapid pace of change in the health care and medical device industry is already well-established and well-documented. I do not have anything new in the way of analysis to add except that the volatility and pace of change in this space will likely accelerate, if that is even imaginable.

Amazing advances in technology, the disruption in the delivery platforms (i.e. Amazon or CVS/Aetna), the aging population and the uncertain regulatory environment will create an environment in which dealmaking in the health care sector will become a prerequisite to survival.

Another industry experiencing rapid change is consumer products. It has become a cliché to blame the millennials for this — but it is pretty much all their fault. They seem to be convinced that they want their own kind of stuff, and it is getting harder and harder to argue that this is just a fad. They demand sustainable packaging around a customized product from a company that was started primarily as a way to do good in the world. And if you ask your new virtual friend Alexa, you will find that millennials will also be the main driver behind the internet of things.

Thus, you can throw everything you learned in your Intro to Economics class about "indifference curves" and "profit maximization" out the window when it comes to the consumer preferences and business strategies of the millennials, but they still need a supply chain. It will just not be the supply chain that most of us are used to; therefore, there is a growing need for strategic alliances along with the incessant need for improved operating efficiencies.

Plastics processors who supply these industries will benefit from robust opportunities, but keeping pace will require a strong investment in technology and talent. These requirements will result in an increase in not only the size of M&A deals this year, but also the number of deals.

Across the whole U.S. economic spectrum, technology acquisition will be the main driver of M&A deals this year. The strategic addition of products and services, particularly digital products and services, will also be a major factor. And thanks to the ongoing shortage of certain crucial skill sets, talent acquisition will increasingly be citied as a reason for making a deal.

To summarize the M&A outlook for 2018, the continued advance of disruptive technologies combined with increased demand for new products will create an environment this year that will drive another year of increases in the size and number of deals made in the plastics industry. In short, the prospects for this year are very good.

But I would be remiss if I did not offer a word of caution. At the present time, the U.S. economy is not built to sustain growth rates in the range of 3 percent without running a huge risk of overheating. The best indicator of an overheating economy is an uptrend in interest rates, so I have included a chart that shows the expected trend in short-term interest rates for your perusal.

As of right now, the economy is not overheating and the expected rise in interest rates this year will not be sufficient to derail the recovery. After a long period of rates that were too accommodative, the Fed is now trying to normalize the rate of interest. This means it is striving for a level that is neither accommodative or restrictive, but rather accurately reflects both long-term risk and growth expectations of the U.S. economy. It should get very close to this rate in 2018.

The trend on the chart represents what I believe is an acceptable pace toward normalized levels, and I am optimistic that this is the path rates will eventually take. But if the trend deviates from this path, then it may be an indication that we are starting to overheat. I do not think this will be a problem for this year, but it could affect the economy and the conditions for dealmaking next year.