Positive M&A Momentum in Second Half of 2013 to Carry into 2014, According to PwC
Disciplined planning and execution support range of deal options in marketplace
Favorable debt and equity markets drive increased opportunities for deals, capital raising and financing
NEW YORK, Dec. 11, 2013 /PRNewswire/ -- Strong momentum in the merger and acquisition (M&A) market during the second half of 2013 is expected to continue into 2014, according to PwC US. Improved stability and early signs of growth in other key global markets have contributed to an increasing level of business confidence and sharpening focus on finding opportunities for growth, setting the stage for positive M&A momentum, according to PwC's year-end M&A outlook, released today.
PwC notes that the average monthly deal volume continued to pick up through the latter part of 2013. According to data compiled by Thomson Reuters and analyzed by PwC, average monthly deal volume increased by 10 percent from 808 deals per month in the first six months of 2013 to 886 deals per month from July through November.
"The improved macroeconomic environment and solid fundamentals for deal making in the U.S. that have been in place over the past two years have increased the level of business confidence in the market, fostering continued M&A activity in 2013," said Martyn Curragh, PwC's U.S. Deals leader. "Dealmakers have also looked to opportunities in the debt market to recapitalize and monetize existing investments, demonstrating the importance of evaluating the range of scenarios available today. Given our pipeline of deals and today's strong debt and equity markets, which help fuel divestitures and exits, we expect that M&A momentum to continue into next year."
Through the first 11 months of 2013, there were a total of 9,280 transactions representing $944 billion in disclosed deal value. The first quarter of 2013 started off strongly, largely as a result of several "transformative" deals (transactions worth more than $5 billion) in February. In that month alone, 695 deals for a total value of $152 billion were announced, the highest since October 2011. Transformative deals accounted for 35 percent of total disclosed deal value in 2013, up from 24 percent last year. "While transformative deals present businesses with great upside potential, they also carry greater risks and uncertainty due to the size and complexity of the transaction," said Curragh. "With this uptick in transformative deals, our clients are focused on navigating potential pitfalls by addressing the long term fundamentals of the business, allowing them to go deeper and broader in their deal assessments."
Average debt to EBITDA multiples continue to steadily increase, reaching 4.5x as of November 2013, according to S&P Capital IQ LCD. This, coupled with attractive terms and availability, provide corporations and private equity firms with options to refinance and pursue liquidity events, while fueling M&A activity and supporting an increase in valuations. A comparison of forward and trailing multiples indicates buyers are projecting significant year-over-year growth in EBITDA, and a greater willingness to embrace growth forecasts.
"There is a high level of optionality for dealmakers in today's market. Dealmakers who seek to capitalize on this dynamic deal environment are continuing to evaluate the best available options. At the same time, they are taking a much more disciplined, thorough approach in preparing to execute on quality deals that have the highest potential for long term value creation," added Curragh. "While the executive interest in executing deals remains strong, the patient focus on executing deals well dominates today's market. Unless we see a significant change in the macroeconomic trend, which creates a downward shift in the direction of the equity and debt markets, or an increase in the level of political uncertainty, deal fundamentals and the desire to grow revenues and boost bottom lines continue to point to sustained M&A activity going forward."
Outbound deal activity U.S. outbound transaction volumes have been on a decline since 2011, partly due to relative stability of the U.S. economy, slowed growth rates in China, and weaker than expected economic performance in Brazil and India. However, this trend may reverse in 2014 as economic certainty in key developed markets such as Europe begins to take foothold. Additionally, as U.S. investors, including private equity firms, domestic corporations and multinationals look for new ways to grow and meet their strategic objectives, and as dealmakers find value in expanding their M&A efforts to international targets, PwC expects an ongoing shift in the expansion to mature markets.
Private equity transactions accounted for 17 percent of total deal value as of November, representing $163 billion worth of disclosed transactions. "Private equity investors have been in a position to take advantage of the debt markets to recapitalize their companies and create liquidity for their investors while building strong long-term businesses," said Andrew Cristinzio, PwC's U.S. private equity leader. "Like corporate buyers and sellers, private equity firms have several options on the table for liquidity and have been strategic in deploying new capital in an environment where there is demand for quality assets."
Divestiture activity remained steady at 30 percent as a percentage of overall deal activity, consistent with the past two years. According to PwC, divestiture activity should continue across most industries as more corporate sellers reduce the size of their portfolios to focus on the assets that matter most to their growth strategies. In an effort to maximize value during the sale process, PwC has seen a continued trend toward greater seller preparation, and expects this will become the norm during the divestiture process. "As sellers look to command greater valuations for their assets, buyers' expectations for high performing businesses are increasing, driving a greater need for confidence on the worthiness of any given deal," added Curragh.
Industry sectors most dependent on technology-driven convergence continue to be ripe for acquisition activity, especially as organizations look beyond their core competencies in adjacent markets to drive profitability, foster innovation and meet customer demand. In addition, notable industries that PwC expects to present opportunities for deal activity in 2014 include:
- Health Industries – Population health strategies, demographic shifts, reimbursement changes, cost and location of care, changing technology, federal and state regulatory changes and capital are variables that demand careful evaluation during the dealmaking process. Insurers' need for scale, geographic breadth and member growth in both government and commercial populations continues, however these strategic imperatives will be challenged by the long term implications of the Affordable Care Act implementation and the health insurance exchange roll-out. Single-site hospitals, smaller health systems, physician groups and ancillary health services (e.g. home care, hospice, imaging, etc.) will continue to seek transactions with larger, better capitalized players to help alleviate margin pressure and provide an avenue to growth capital. As a result, larger non-profit health systems and for-profit hospital management companies will find no shortage of acquisition opportunities. Larger provider deals may continue to flourish in 2014, as large for-profit deals further consolidate the national provider landscape. PwC also expects to see a continued emphasis on M&A activity across pharmaceutical, biotechnology and medical device sectors with companies seeking new product offerings and access to new geographies to accelerate growth. Further, with numerous pending divestitures in the pipeline, the pharmaceutical and life sciences industry will also continue to use divestitures to rebalance product portfolios and unlock shareholder value.
- Retail & Consumer –Following a strong year, fundamentals remain in place for continued deal activity in the sector. Robust equity market valuations and receptiveness to recent industry IPOs have led some private equity funds and corporates to pursue IPOs or spin-offs as an alternative to a traditional M&A transaction. There is potential for more alternative transaction structures and break up strategies in light of increased shareholder activism and the overall valuation environment in the sector. PwC expects cross border retail and consumer product industry deals to continue as companies seek growth in emerging markets.
- Technology – Third quarter deal activity demonstrated robust growth in both volume and value, setting the stage for a strong finish in 2013. Technology deal values have been driven by a handful of deals with value greater than $5B. The lack of mid-cap transactions has been impacted by an active, valuation rich IPO market that has caused incumbents to reign in their acquisitions of high profile start-ups and recently public new entrants. Liquidity of enterprise and consumer technology consolidators combined with the need to address high growth markets in cloud, mobility and big data should lead to acquisitiveness by incumbents, even at higher valuations. Recent semiconductor deals point to a consolidation cycle which, when added to increasing divestiture activity and continued interest from private equity, collectively set the stage for healthy growth in 2014.
- Real Estate – Real estate is currently the fastest growing industry in terms of U.S. deal volumes with an increase of over 40 percent to 872 deals in the last twelve months ending November 2013. Real estate is gaining momentum as the economy continues to progress. According to PwC and ULI's Emerging Trends in Real Estate 2014, 2014 should be a year when real estate fundamentals improve and investors begin to reduce their focus on core properties and primary markets. As such, PwC expects investors will begin to search for higher returns in value-added and opportunistic investments in secondary locations.
- Telecommunications – The telecommunications industry saw a significant amount of consolidation on the services side in 2013. With larger players in mobile communications services focused on integrating those acquisitions, the industry is likely to experience a shift to smaller deals in the non-consumer services side such as in fiber optic networks, hosting/cloud services, and engineering services. Additional opportunities for niche, tuck-in acquisitions exist, with a particular focus on technology acquisitions in areas such as cloud and security.
For further insight on the outlook for M&A in 2014, join PwC's Deals webcast on Monday, December 16 at 1:00 p.m. E.T. To register, visit: www.meetpwc.com/2014outlook.
PwC's Deals practitioners help corporate and private equity executives navigate transactions to increase value and returns. In today's increasingly daunting economic and regulatory environment, our experienced M&A specialists assist clients on a range of transactions from smaller and mid-sized deals to the most complex transactions, including domestic and cross-border acquisitions, divestitures and spin-offs, capital events such as IPOs and debt offerings, and bankruptcies and other business reorganizations. We help clients with strategic planning around their growth and investment agendas and advise on business-wide risks and value drivers in their transactions for more empowered negotiations, decision-making and execution. We help clients expedite their deals, reduce their risks, capture and deliver value to their stakeholders and quickly return to business as usual. Our local and global deal strength is derived from our deal professionals in 35 cities in the U.S. and across a global network of firms in 75 countries. In addition, our network firm PwC Corporate Finance provides investment banking services within the U.S. For more information, visit www.pwc.com/us/deals
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 Note: Deal value excludes $130b investment by Verizon Communications in Verizon Wireless on 9/2/2013
SOURCE PwC US