A wave of corporate mega deal activity drove a significant uptick in M&A value in 2014, according to PwC US. As businesses aim to meet their growth ambitions and increase market share, PwC expects there will be more attractive opportunities for dealmakers to acquire, combine and align with strategic partners in 2015.
Currently, M&A value is at the highest level in recent history and continues to increase. Through November 2014, there were 10,330 transactions representing $1.9 trillion in disclosed deal value – the highest recorded annual deal value since 2007, according to data compiled by Thomson Reuters and analyzed by PwC. The top ten deals of 2014 were predominantly from the media, telecom and pharmaceutical industries and have driven 32 percent of M&A value to date. This year also saw a surge in overall deal value (93 percent) when compared with the same period in 2013, which recorded 9,895 deals worth a total of $1 trillion.
“Corporate acquirers are going on the offense to solidify their leadership positions and build on core capabilities,” said Martyn Curragh, Advisory principal and PwC’s U.S. Deals leader. “A perfect storm of rising equity markets, a stable U.S. economy and easy access to favorable financings are supporting the current robust deal environment, particularly corporates’ growing appetite for transformational deals. We expect the current M&A momentum to continue in 2015, but with a more balanced mix of large and middle market deals as businesses turn their focus to executing strategic transactions to capture full value.”
Transformational deals continue to drive growth in both domestic and cross border deal activity. U.S. inbound investments have increased threefold in the last year from $118 billion in 2013 to $379 billion year-to-date, signaling the strength and confidence in the U.S.economy. According to PwC, constrained market conditions overseas and a strong U.S. economy have created a unique time for investors, helping to drive higher valuations and transaction multiples. Low interest rates and rising equity markets have also given corporates the confidence to unlock their cash vaults and execute strategic deals.
Corporate-led transactions drove 82 percent of volume and 89 percent of M&A value in 2014. Corporates also led the majority of mega deal activity with 27 deals greater than $10 billion, approximately 47 percent of overall deal value in 2014. “During the recession, businesses focused on fine tuning existing operations with smaller tuck-in deals to protect their revenue base. But as confidence continues to increase in the U.S. and globally, businesses have become much more willing to execute on larger, strategic deals to grow their bottom lines – while understanding that bigger bets come with more risk and complexity,” added Curragh.
According to PwC, dealmakers are investing in more thorough pre-deal readiness assessments to ensure they can preserve value and be more resilient in the face of potential threats or barriers to growth, including market volatility, regulatory changes, or even a cybersecurity breach.
An uptick in shareholder activism has also driven a number of deals in 2014. As assets under management in activist funds have increased, so have the number of activist campaigns and the size of the companies being targeted. According to PwC, companies can minimize the impact of these events by having a clearly defined deal strategy, deep understanding of their portfolio, and an effective shareholder engagement plan.
Private equity transactions accounted for 18 percent of volume with 1,852 deals, and 11 percent of value at $213 billion, a slight increase when compared with the growth in corporate deal activity.
However, with greater competition for platform deals, and a challenging market for public to private deals, private equity buyers are undertaking “buy and build” strategies to achieve growth.
“With a hyper competitive market for quality assets, private equity firms are continuing to explore their options to exit current investments through various means, including the IPO market,” said Andrew Cristinzio, PwC’s U.S. private equity leader. Current capital market conditions are providing a favorable environment for newly listed public entities. U.S. IPO activity reached record levels in 2014 with the increase largely driven by private equity exit activity.
According to PwC’s Q4 IPO Watch, financial sponsors backed 61 percent of IPO volume and 71 percent of value. PwC expects private equity firms will to continue to take advantage of the public markets as a channel to exit portfolio investments.
“Private equity players are also exploring opportunities to acquire newly divested corporate assets which have the potential for value creation as a standalone entity,” continued Cristinzio.
Divestitures represented some of the largest deals of the year with the top five divestitures amounting to approximately $88 billion in deal value. According to PwC, there were 18 spin-off IPOs in 2014, a 38 percent increase over the 13 spin-off IPOs in 2013. Divestiture activity continues to be a core part of corporate deal strategy, but sellers have more options for their assets with the current favorable market conditions.
“The capital markets have been very receptive to divested assets, corporate restructurings, and spin-offs that have strong long term prospects,” said Curragh. “And as businesses continue to reshape and optimize their portfolios to address the impacts of globalization, changing demographics, and digital disruption, we expect there will be no shortage of favorable assets that come to market in the next year or so.”
According to PwC, joint ventures and business alliances are becoming more prevalent as businesses seek to extend their capabilities into adjacent or entirely different industries and to capture innovative technologies even faster. The impact of digital disruption and innovation has fuelled continued convergence across industries like technology, healthcare and pharma. PwC expects the following industries to continue to present more opportunity for M&A activity in 2015.
— Healthcare – Dynamics in the U.S. healthcare system have caused a shift in risk from payers to providers, fundamentally changing how care is paid for and delivered. To meet new expectations of care delivery and the number of people and services covered, payers and providers will continue to create new alliances and partnerships to integrate and consolidate the entire continuum of care. PwC expects joint-ventures, open collaboration platforms and non-traditional partnerships will push healthcare organizations to embark on new competitive strategies in 2015 and years to come.
— Technology – Innovations in cloud, social and mobile are putting tremendous disruptive pressure on incumbent large and medium cap technology companies, many of which led the previous consolidation wave. As a result, there has been a trend in fragmentation consisting of divestitures, spin-offs and go-private transactions which PwC expects will be the dominant theme in technology deals in 2015. PwC also expects continued consolidation in the semiconductor segment and an increase in growth oriented deals from more nimble leaders and recently public new entrants. Key areas to watch include security, data analytics and enterprise cloud.