NEW YORK, July 18, 2012 /PRNewswire/ -- While uncertainty over the global economic environment and volatile equity markets significantly slowed U.S. deal volume earlier in the year, an uptick in activity during the end of the second quarter, in conjunction with an active pipeline, indicates the M&A market is regaining momentum, according to PwC US. With corporations focused on executing targeted growth strategies, reshaping their businesses to prosper in the current economic environment, and preparing to execute and close on transactions in the pipeline, PwC expects U.S. merger and acquisition (M&A) activity to accelerate into the second half of 2012.
"Deal activity has continued at a measured pace over the last several quarters. The uptick in deal value and recent climb in the rate of deals in the second quarter adds to growing levels of businesses looking to execute on transactions," said Martyn Curragh, PwC's U.S. Deals Leader. "During the first half of 2012, we've been extremely active in working with clients to prepare for a range of transactions. As deals continue to emerge from the backlog, we expect to see an increased level of activity in the second half of the year."
Corporates continue to grow cash reserves – with S&P 500 companies' combined cash totals reaching nearly $1.1 trillion as of March 2012 – in addition to more readily available debt financing. According to PwC, both factors provide additional flexibility for buyers and bode well for an uptick in activity.
There were a total of 3,870 transactions and $350 billion in disclosed deal value during the first half of 2012, compared to 4,606 deals and $592 billion in the same period of 2011. In the second quarter of 2012, there was a considerable uptick in disclosed deal value with $218 billion and a total of 1,891 deals, demonstrating a 'high' for aggregate disclosed deal value in recent quarters. By comparison, there was $132 billion in disclosed value and a total of 1,979 deals in the first quarter of 2012. In June alone, total deal value reached $76 billion, the best month for M&A value since October 2011 when deal value totaled $88 billion.
Middle market deals accounted for $123 billion, or 35 percent, of total deal value – a notable uptick for the first half of 2012. In terms of volume, middle market transactions contributed nearly 98 percent of total deal activity in the first half with 3,788 deals. The competition for middle market transactions is driving up the valuation of these deals, placing even greater importance on robust diligence of revenue growth and operational improvement opportunities and development of the post-deal integration strategy earlier in deal preparation, according to PwC.
"Deals slowed earlier in the year as a result of challenging debt markets and companies being more cautious in their M&A strategies. In taking a more thorough approach to processes and diligence, dealmakers focused on ensuring a successful outcome in what was a very uncertain macroeconomic environment," said PwC's Curragh. "Patient private equity and corporate dealmakers are evaluating every potential scenario with thoroughness of diligence taking priority over speed of execution. That cautious and flexible approach is paying off. With macroeconomic economic conditions having somewhat stabilized and a building pipeline of transactions in recent months, we expect deal activity to increase in the second half of 2012 as these preparations move toward execution and close."
Divestiture activity is on the rise, accounting for nearly 28 percent of overall deal volume in the first half of 2012 versus 22 percent in the same period of 2011. As more companies look to reshape their businesses by divesting of "orphan" or non-strategic assets to focus on core revenue generators, sell-side diligence has played a more prominent role in preserving the seller's deal value, expediting deal close and enhancing the potential for buyers to optimize financing.
Private equity players are also stepping up, eagerly pursuing middle market deals across a range of industries and exiting investments at a faster rate than in previous quarters. Private equity buyers accounted for 17 percent of activity and $46 billion in the first half of 2012. While the majority of IPO activity and value has been largely driven by financial sponsors, private equity continues to enhance their prospects for exit by preparing for a variety of scenarios, according to PwC.
"The deal market continues to be extremely competitive, with experienced buyers scrutinizing every aspect of a potential asset. They are asking for greater levels of financial and operational information to increase their visibility into a potential acquisition and well-prepared sellers who are able to meet those demands, are enhancing their prospects of getting a deal done expediently," said Tim Hartnett, U.S. Private Equity Leader. "Private equity funds have also significantly increased the number of exits over the first six months of the year, and are preserving optionality in readying their portfolio companies for multiple monetization possibilities – go public, be sold or secure additional debt financing."
According to PwC's recently released 15th annual Global CEO Survey, 40 percent of U.S. CEOs are planning an acquisition in an emerging market this year, compared to 28 percent of CEOs in other parts of the world. The increase in outbound deals during the first half has exemplified that sentiment as U.S. outbound activity accounted for 28 percent of total deal activity versus 26 percent during the same period of 2011. "Clients are activating our connections across the PwC global network of firms to pursue deals in developing markets, where successfully navigating the transaction to close requires both local and U.S. experience," added PwC's Curragh.
Notable sectors that continue to present opportunities include:
- Healthcare & Pharmaceuticals – While there has been a relatively high level of deal related discussions taking place, overall first half 2012 deal volume remained relatively comparable to 2011. However, now that one pillar of uncertainty has been addressed by the Supreme Court's recent ruling to uphold key components of the Affordable Care Act, PwC expects deal momentum to accelerate throughout the remainder of 2012. Continued convergence among payers and providers has uprooted legacy business models and opened up new opportunities for the sector to build scale and eliminate inefficiencies in the value chain that were previously inaccessible, which will drive M&A activity in the second half of 2012. While PwC expects activity to primarily come from middle market deals, larger players will likely seek to take advantage of the increased 'certainty' gained from the recent Supreme Court ruling to increase the breadth and geographic reach of their services. Private equity will also continue to play an important role in healthcare M&A activity across all sectors as these investors will look to healthcare for global growth opportunities, especially in areas that are viewed as less sensitive to government reimbursement. For pharmaceuticals, PwC expects to see increased consolidation in the middle market as companies look to gain economies of scale – particularly in specialty pharma and CRO space. As big pharma continues to focus on managing and right-sizing their portfolios of global assets, continued divestiture activity is expected as companies sell off assets that are no longer core revenue generators or in key markets. PwC expects companies to deploy capital in technology focused tuck-in acquisitions as well as continued actions on their emerging markets agenda.
- Financial Services – Divestitures will drive the majority of financial services deal activity in the second half of 2012, according to PwC. Private equity continues to be active across the financial services sector, and with favorable credit markets for leveraged buyouts, PwC expects activity from financial buyers to increase. Despite an increased willingness from both corporate and financial buyers to engage in the deal process for attractive assets, announcements will be limited until buyers and sellers can narrow the gap for valuations. The Eurozone crisis, weaker Asian economies, regulatory reform, and volatile credit and equity markets will drive European banks to divest U.S. asset management businesses to improve their capital positions, while insurance companies continue to divest assets that are no longer core to their operations.
- Technology – Technology M&A activity continued to thrive in the first half of 2012, as industries continue their inexorable shift to the digital age. Technology deals comprised roughly 21 percent of total U.S. M&A volume in the first half of the year and are expected to drive a substantial level of M&A activity in the latter part of 2012. The competitive response to consumer demand for ubiquitous access to data via mobile, tablet, and other network-connected devices and a clear enterprise-level shift to cloud technologies has created a fertile M&A market for technology businesses. These macro-trends are further evidenced in that nearly half of technology M&A deals were driven by the software and internet sectors. There is continued strong M&A demand for those companies that have managed to deliver innovative solutions to consumer tastes and address an employee base that increasingly demands the same user experience in the workplace as at home. At the same time, technology IPOs in the first half remained very strong and PwC expects continued interplay between the IPO market and M&A for technology companies.
- Entertainment, Media & Communications – PwC is continuing to see large multi-nationals evaluate their current portfolios and has also witnessed other strategic transactions in specific sectors such as telecom; hotel, leisure and casino; and the sports market. Broader deal activity is expected to continue increasing for social media companies, content providers (including production companies domestically and internationally) and media libraries, which are attractive to online digital providers. Strategic acquisitions of online gambling providers could become more active in preparation for the potential of legalized online gambling. Divestitures remain a key driver of entertainment, media and communications deals as companies continue to evaluate strategic changes to their portfolios as the industry continues to evolve.
PwC's Deals practitioners help corporate and private equity executives navigate transactions to maximize value and returns. In today's increasingly daunting economic and regulatory environment, 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 the business-wide risks and value drivers in their transactions for more empowered negotiations, decision making and execution. Clients can then expedite their deals, minimize their risks, capture and deliver value to their stakeholders, and quickly return to business as usual.
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