NEW YORK, Dec. 8, 2014 /PRNewswire/ -- According to EY, the dynamics that made 2014 a record year for US dealmaking1 will continue into the new year, pointing to ongoing buoyancy for the M&A market in 2015. US deal volume rose 5.1% in 2014, with 10,889 deals compared to 10,360 in 20132. Meanwhile, value soared to $1.6 trillion in 2014, up 40.7% from $1.1 trillion in 2013. This trend is likely to stay on course; 81% of executives expect the deal market to improve in the next 12 months, while 41% of US companies have five or more deals in their pipeline versus just 8% of companies six months ago3.
US deal value was affected by a surge in high-profile megadeals. In 2014, 228 deals were worth between $1 billion and $10 billion, up 37.3% from 166 deals in 2013. Additionally, 21 deals were valued at $10 billion or more in 2014, up 75.0% from 12 such megadeals in 20134. On a global level, the United States was involved in nine of the 10 largest deals in 2014.5 Moreover, the US was the most targeted country in 2014, with 1,210 inbound deals worth $234.8 billion6.
"2014 saw the US deal market get back to where it was headed prior to the sustained 2008 financial crisis," said Rich Jeanneret, EY Americas Vice Chair, Transaction Advisory Services. "Based upon continued confidence and strong dynamics which include low interest rates, an improving economy, and robust corporate earnings, we expect deal growth to stay strong in 2015 and to draw out the middle market. Set against the global backdrop of post-crisis rebalancing and a divergence in performance across countries and industries, the US has proven to be ahead of the curve."
Shareholder activism has had, and will continue to have, a significant impact on M&A. "More than ever, shareholder activists are keeping management on their toes," said Jeanneret. "This fosters an environment where assets, brand and strategic vision are in a state of constant assessment. This environment bodes well not only for deal volume but also transaction type, and we expect to see greater levels of spinoffs, splits and carveouts over the next year."
Spins, splits and carveouts pave the way for the next wave of M&A
Divestitures are in the spotlight, as companies undo past mergers and growth strategies that no longer fit with their core businesses. "Companies are trying to free up capital and are asking whether the sum of the parts is greater than the whole," said Jeanneret. "Executives know that divesting as a strategic alternative is just as important to creating value as other transactions. This wave of spinoffs and splits will inevitably lead to additional M&A, predominantly in the middle market, as the spun-off businesses seek to bulk up or become acquisition targets themselves."
Private equity's pipeline: IPO's at the forefront
Private equity exits, and IPOs in particular, took center stage this year, bringing the industry back into equilibrium. There were 409 US M&A exits in 2014, up 36.7% from 299 in 2013. Value spiked 50.7% to $154.7 billion in 2014 versus $102.6 billion in 2013. Meanwhile, 2014 saw 90 US IPOs of PE-backed companies, essentially flat from 2013, when 92 deals debuted. Value, however, nearly doubled, up 96.0% to $59.2 billion in 2014 from $30.2 billion in 20137. With the IPO pipeline robust, and assuming stock exchanges remain receptive, 2015 should exhibit a similar trend line.
Additionally, 2014 saw 772 PE acquisitions, up 6.3% from 726 in 2013. While volume increased, PE acquisition value dropped 21.0% to $100.7 billion this year, down from $127.5 billion in 2013. Average 2014 deal size was $381 million. In terms of fundraising, 335 funds were raised in 2014, up from 323 funds in 2013. Fundraising value reached $247.8 billion in 2014, up 8.4% from $228.7 billion in 20138. Large funds accounted for 72% of fundraising this year9. An increased level of dry powder, coupled with a continued accommodative financing environment, should translate into an increased level of buyouts in 2015.
Private equity investing activity has been relatively consistent across a number of industries, with highly visible activity in technology, energy and financial services. Over the past 10 years PE has graduated from a generalist model to a sector approach, focused on specific subsectors. North American funds are currently sitting on $260.2 billion of dry powder10.
"As corporates continue to challenge their core business portfolio and actively carve-out non- performing businesses, PE will be an interested buyer, said Jeff Bunder, Global Private Equity Leader.
Private equity firms will target carve outs next year and will want a seat at the table as corporates decide whether to sell or spin. The challenge for PE firms will be finding deal opportunities and putting money to work as they face competition from their peers, as well as an increasing number of corporates coming into the market with conviction.
"Private equity is firing on all cylinders," Bunder added. "Fundraising, investing, and exits have been robust in 2014, and in 2015 we expect these trends to continue. While the United States and Europe are attractive investment destinations for PE, the emerging markets remain a focus, and we expect to see an increase in invested capital in these markets as well as frontier geographies."
Sectors to watch in 2015
Particularly active sectors in the US include technology, life sciences, healthcare, consumer products and financial services. Across industries, companies are either stripping down to their cores, or consolidating and pursuing acquisitions in order to fill gaps in innovation.
Technology continues to be a hot sector for M&A, with 2,400 US technology deals, up 13.4% from 2,117 in 2013. The value of US technology deals increased even more substantially, with transactions valued at $171.6 billion this year, up 26.7% from $135.5 billion last year11.
There has been a two-pronged approach to M&A activity in the tech sector this year. Some companies are making big bets to acquire not just market share, but also new technologies, because they are unable to innovate quickly enough on their own. At the same time, established companies that have historically grown and built value through consolidation are now pursuing a massive reversal in strategy as they sell off noncore assets in order to stay nimble and respond to shareholder pressure.
"Whether companies are new or old, we're at a point in time when they are all competing from the same starting line," said Jeff Liu, EY Global Technology Leader, Transaction Advisory Services. "The incumbents are no longer in charge, and they will have to race to solutions that are more cloud- and mobile-based, and more consumer-facing. The wave of split-ups we saw this year is just the beginning. Next year there will still be a range of companies that will be forced to transform through breakups, spinoffs or going private."
Life Sciences and Healthcare
Although the number of life sciences deals was down 18.7% to 603 in 2014 from 742 in 2013, deal value shot up 49.5% to $304.4 billion this year, compared to $203.6 billion last year12. The life sciences sector continues to be extremely active, and valuations have reached new heights as the industry continues to transform. Large pharmaceutical companies are selling off their mature brands, while generic companies are broadening out into the branded space.
"Pharmaceutical companies have been focused on narrowing their businesses to core strategic areas, and they have been rewarded by the Street for effective portfolio rationalization," said Ben Perkins, US Mergers & Acquisitions Life Sciences Sector Leader, Ernst & Young Capital Advisors, LLC. "At the same time, a tremendous consolidation in medtech will create divestiture opportunities next year. We expect both medtech and the life sciences diagnostics subsectors will undergo significant restructuring over the next two years."
Commenting on specific areas of activity, Perkins added: "Deals in animal health, consumer health, and vaccines will create a cascade of transactions in those areas, and oncology will be active as well. The US has and continues to be the most attractive destination for life sciences dealmaking, and Japan is especially interested in the US market. While emerging market activity has been quiet, life sciences companies realize long-term growth resides within the emerging economies; so we will likely see an uptick in emerging markets in 2015 that we haven't seen this year."
Healthcare deal volumes moved up slightly, increasing by 4.1% to 406 deals in 2014 from 390 deals in 2013. Transaction values rose to $28.1 billion, up 25.1% from $22.4 billion in 201313.
"The healthcare sector continues to transition from volume-driven care to value-oriented care, with companies broadening and deepening their presence across the healthcare delivery and payments value chains via M&A strategies," said Gregory Park, US Mergers & Acquisitions Healthcare Sector Leader, Ernst & Young Capital Advisors, LLC. "With ongoing cost pressures, in part stimulated by the Affordable Care Act, corporate M&A strategies have incorporated both consolidation plays through horizontal integration and convergence plays through vertical integration, with a common focus on getting closer to the consumer.
"Regardless of the political risk associated with the Affordable Care Act surviving in its existing form, the current momentum in healthcare—towards a consumer-oriented approach where cost, quality, and superior medical outcomes are paramount—feels too strong to reverse," added Park. "While deal activity has been concentrated in the US, we're likely to continue to see opportunistic investments by American healthcare facilities and managed care companies in both mature and emerging markets."
Consumer products deal volume was relatively flat in 2014, up just 1.9% to 981 this year from 963 last year. However, the rise in deal value was impossible to ignore at $185.1 billion in 2014, up 61.3% from $114.8 billion in 201314.
As is the case with other industries, size is no longer an asset for consumer products companies, nor is it necessarily valued by shareholders. "The floodgates are opening, and companies are being rewarded for focus, even if it means divesting noncore brands, which can be dilutive to earnings," said Steve Potter, US Consumer Products Sector Leader, Ernst & Young Capital Advisors, LLC. "The stars are aligned for realizing a high value for assets that are no longer deemed core to one's business, although that window may not be open forever."
Financial services deal volumes were down 3.2% this year, with 1,008 deals in 2014 compared with 1,041 in 2013. Overall deal value was also down 12.6% to $88.4 billion in 2014 from $101.1 billion in 201315. However, the financial services industry has moved into more strategically disciplined dealmaking; as several companies are chasing few deal opportunities, M&A in the sector is poised to grow.
Nadine Mirchandani, EY Americas Financial Services Leader, Transaction Advisory Services, cited positive energy in financial services and a very robust US deal market. "Large banking institutions won't be doing transformative transactions, but they will continue to divest of non-core pieces and redeploy capital to actively grow," she said. "In addition, we see an increasing appetite for foreign banks to establish or expand existing operations in the US."
"We're also seeing the rise of specialty financing, like auto lending, filling the void where traditional institutions are no longer providing credit," Mirchandani continued. "Meanwhile, new FinTech players in the payments space and market infrastructure are gaining attention. We continue to see a healthy level of consolidation on the traditional side of asset management, but we are also seeing the expansion of alternative multi-asset strategy boutiques. Finally, insurance is becoming a much more active deal space, with property and casualty deals on the rise and systemic institutions both divesting and investing to drive synergies through their operations."
The impact of inversions and cybercrime
Inversions to continue, but at a slower rate
While 2014 was dotted with headline-grabbing inversion deals, most US corporates are not considering relocating abroad as a business strategy. Looking into 2015, inversion activity at some level will continue, as companies pursue inversions primarily for strategic reasons unconnected to tax incentives.
"The climate for inversions has chilled," Jeanneret said." But, the M&A landscape is still driven by strategic considerations and the availability of capital, and that is expected to continue. The extra tax benefits will not be the primary catalyst. These benefits have always been the icing on the cake, not the driving motivation behind a deal."
Cyber-risk overlooked in M&A
As M&A activity continues to play out next year, executives are becoming increasingly aware of the potential threats of cybercrime. According to EY's latest US Capital Confidence Barometer, only 6% of companies are concerned about the impact of cybersecurity on their core business next year, and just 7% are concerned about its impact on their acquisition strategy16.
M&A routinely creates opportunities for cyber-security breaches. With investors showing increased interest in boards' preparedness for cyberattacks, the emphasis on cyber as part of both business and M&A strategy will likely increase over the coming years. "Cyber-threats are not just an IT issue—they represent a broader campaign against companies' key strategic business imperatives," said Jeanneret. "Management teams need to understand what the 'threat actors' want to do with their company's information and the potential impact a breach could have on revenue, profit, market share, market value and brand reputation. Cybersecurity and related economic risks are often overlooked during both diligence and integration, which is contrary to the emphasis placed on mitigating transaction risk and maximizing rate of return."
"The environment is extremely conducive to dealmaking, and we expect the US M&A market to continue to be active in 2015," Jeanneret concluded. "However, despite high transaction volumes and values, the current wave of M&A shows much more disciplined and rigorous analysis of deal opportunities than we have seen in past deal frenzies. Next year, big corporate deals will not disappear, but they will also open the door for a follow-on rush of smaller, middle-market transactions."
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
This news release has been issued by Ernst & Young LLP, an EY member firm serving clients in the US.
Ernst & Young Capital Advisors, LLC (EYCA) is a registered broker-dealer and member of FINRA (www.finra.org) providing sector-specific advice on M&A, capital markets and capital restructuring transactions. It is an affiliate of Ernst & Young LLP, a member firm of Ernst & Young Global Limited serving clients in the US.
1 Dealogic data as of 11/30/14; accessed 12/2/14
2 Dealogic data as of 11/30/14; accessed 12/1/14
3 EY's US Capital Confidence Barometer; October 2014
4 Dealogic data as of 11/30/14; accessed 12/1/14
5 Dealogic data as of 11/30/14; accessed 12/1/14
6 Dealogic data as of 11/30/14; accessed 12/1/14
7 Dealogic data as of 11/30/14; accessed 12/1/14
8 Dealogic data as of 11/30/14; accessed 12/1/14
9 Dealogic data as of 11/30/14; accessed 12/1/14
10 Dealogic data as of 11/30/14; accessed 12/1/14
11 Dealogic data as of 11/30/14; accessed 12/1/14
12 Dealogic data as of 11/30/14; accessed 12/1/14
13 Dealogic data as of 11/30/14; accessed 12/1/14
14 Dealogic data as of 11/30/14; accessed 12/1/14
15 Dealogic data as of 11/30/14; accessed 12/1/14
16 EY's US Capital Confidence Barometer; accessed 11/3/14
To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/big-deals-persist-generating-momentum-in-the-middle-market-for-2015-says-ey-300005937.html