PwC US Year-End M&A Outlook: Strategic Focus Shifts From 'Recovery to Growth,' According to PwC US

Recovering Capital Markets Promoted Stabilization of M&A Activity in 2010;

Middle Market Activity Continues to Dominate;

Availability of Attractive Debt Financing and Cash for Equity Investment Yields Confidence for Dealmakers in 2011

Dec 09, 2010, 10:00 ET from PwC

NEW YORK, Dec. 9, 2010 /PRNewswire/ -- The beginning of a strong, and quicker than expected, comeback from the capital markets bolstered U.S. mergers & acquisitions (M&A) activity in 2010, according to PwC US.  Despite a surprising lack of opportunities in distressed acquisitions, trends emerging in the second half of 2010 – including increased corporate M&A activity (particularly in the middle market), the availability of attractive debt financing, and stronger valuations for corporate assets – helped strengthen the U.S. deal landscape. At a macro level, PwC believes the key conditions are in place for a resurgence in deal making in 2011.

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"For the past 18 to 24 months, companies focused their deal making strategies on synergies to improve cost structures to withstand the challenging economic environment," said Martyn Curragh, U.S. Transaction Services Leader, PwC.  "Backed by stronger credit and equity markets going into 2011, corporates have shifted their transaction focus from a mindset of recovery to strategic growth, to generate additional revenues.  Furthermore, as debt markets have improved, private equity funds are beginning to spend more time looking for and executing on new opportunities, rather than focusing on existing portfolio companies and waiting to deploy capital."

While deal volume was flat for the 12 months ended November 2010 as compared to 2009, deal value increased nine percent to $786 billion from $722 billion, led by significant growth in deal value in the Energy and Power, High Technology and Real Estate segments, according to Thomson Reuters.

Corporate deals drove M&A activity in 2010, both in terms of deal value and volume. While mega deals were relatively limited in number due to fluctuating levels of confidence in the global economy and, in turn, perceived levels of risk, middle market deals presented opportunities for growth.

For corporates, it has become clear that earnings growth is dependent on top line growth as excess costs have already been cut out of existing businesses. According to PwC, corporates are again focused on growth via acquisitions both in new geographic markets but also in adjacent sectors and new technologies.

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Improving capital markets and the availability of debt helped narrow the gap between buyers and sellers.  These factors, along with the pent up supply of private equity capital also helped facilitate deal activity, according to PwC.

"The doomsday predictions for 2010 were overhyped and the expected volume of distressed company deals didn't materialize.  Banks have begun to lend again and, along with bondholders, have extended loans and been increasingly receptive to refinancing existing debt," said Tim Hartnett, U.S. Private Equity Leader, PwC.  "If you are a distressed entity today, it's likely due to operational problems and not a balance sheet issue."

For the 12 months ended November 2010, private equity deal size and activity returned to levels seen in the 2003 and 2004 timeframe.  Also during the second half of 2010, the bank market for leveraged deals returned and bond markets revived. As a consequence, financing terms available are now much more attractive to private equity buyers with substantial capital to invest and a strong appetite for deals.

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According to PwC, returned interest from private equity buyers has encouraged U.S. corporates to accelerate carve out plans, a trend likely to continue. "With prices firming up and capital available again, corporates have an opportunity for the first time in several years to generate cash at higher multiples while strategically divesting of certain assets," said PwC's Curragh.

Corporates are seeing their valuations rebound, and hence are reevaluating their portfolio of business and executing on strategic realignment so that they are top 1 or 2 in their chosen businesses. They have begun to exit those which they are not leading the competition and are focused on completing add-ons for those that are.

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Middle market transactions remained a strong presence in the 12 months ended November 2010 with 724 deals and a total value of $240 billion, representing a 54 percent increase over 2009, which saw 469 middle market deals with a total value of $141 billion, according to Thomson Reuters.

PwC believes macroeconomic fears and market volatility have outweighed the appetite for growth, adversely impacting the level of cross border mega deals in 2010. "Furthermore, the lack of supply in large public to private transactions and large divestitures has benefited the middle market and we expect that to continue," said PwC's Hartnett.

Average deal size increased by 13 percent in 2010 from $219 million in 2009 to $247 million in the 12 months ended November 2010, a reflection of the excess supply of private equity dollars, availability of debt, and more optimistic strategic buyers.

While global dry powder in private equity has declined over the last two years, corporate cash levels have been steadily increasing and now exceed $1 trillion for the S&P 500 alone, an indication that corporates have the supply to fuel their strategic M&A plans.

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According to PwC, Energy and Power show substantial increase in deal value from 2009 to 2010, while Financial Services and Healthcare deal value dropped significantly, indicating a shift in the relative size of the players and changing valuations from sector to sector.

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Sectors that continue to present opportunities include:

  • Energy and Power– In the energy sector, as hedges start rolling off independent exploration and production companies, PwC says there may be an uptick in asset transactions as companies react to changing economics of their portfolios.  Shale deals completed over the past three years are just the beginning of an asset shift in the industry, and the lucrative high-technology intensity shale development wells will make small equipment and service providers attractive acquisition targets. For the power and utilities sectors, consolidation will continue over the next several months as announced regulated utility deals complete the regulatory approval process and valuations remain low for selected independent power plants.  PwC believes these factors will continue to drive transactions as companies look to enhance share value and diversify geographically, and others look for opportunities to buy, versus build in certain areas.  Companies are looking to create larger balance sheets to assist with their capital expenditure plans.
  • Healthcare and Pharmaceutical – Increased M&A and joint venture activity will accelerate, driven by the need to reduce costs, increase productivity and develop more integrated business models.  Managed care companies will continue to pursue growth opportunities abroad to diversify geographic risk, while the medical device industry will be driven to consolidate by the need to achieve cost savings as they combat the impact of federal excise taxes and downward pressure on pricing and reimbursement.  Pharmaceutical companies will also reshuffle portfolios and use divestitures as another way to return value to shareholders.   PwC expects there will be new market entrants due to personalized medicine and disruptive forces, such as mobile health, and that private equity will become much more active in the sector.
  • Financial Services – Increased regulations and the desire for financial institutions to better manage their risk will lead to significant shifts in the financial sector.  Subsectors such as proprietary trading and consumer credit will lead the way in divestiture activity.  Additionally, opportunities will continue to exist for investors to acquire out of favor asset classes currently held by the large financial institutions.  
  • Technology –  After rebounding in late 2009, technology M&A volumes and aggregate values sustained upward momentum throughout 2010 with growth in virtually all key sectors and overall for financial and strategic buyers.  Economic optimism, strong liquidity, technology shifts, sector consolidation and acquired innovation will continue to drive growth in technology M&A.  The decade long enterprise technology landscape will continue to consolidate around a handful of end-to-end hardware, networking, software and services companies which will also look to acquire technologies to differentiate or fill gaps in their cloud offerings. Meanwhile, pure play alternatives will maintain their positions through tuck-ins and by combining with one another.  Look for continued acquisitions surrounding devices, services and media oriented towards mobile connected consumers and enterprises.  Internet majors will looks to expand their offerings into local services and continue to respond to massive shifts in user behavior oriented towards community and social networking services.  
  • Aerospace & Defense – M&A activity in the defense sector is expected to increase due to companies re-thinking their core business as defense spending priorities continue to evolve.  PwC expects cyber security and communications will be emphasized among defense spending priorities.  Over the long haul, major defense consolidations could unfold as growing budgetary pressures force companies to improve efficiencies.  Also, increased M&A in the commercial aerospace sector is expected given the robust long term forecast for aviation.
  • Automotive – Over the next three to five years, M&A will be driven by new technologies, regulations and consumer requirements.  Tier one suppliers will work to realign their product portfolios to take advantage of the restructured industry.  Developed markets will focus on fuel economy, hybrid and electric vehicles and infotainment and communications in vehicles, while developing markets will focus on delivering low cost vehicles and acquiring technologies.

Other factors influencing M&A activity in 2011 may include the following scenarios:

  • The wildcard * Continued concerns about the economic health of Europe, and countries like Ireland, Portugal, Spain, and others may impact global banks propensity for lending and overall confidence in the global capital markets and sovereign governments ability to prop up their respective financial systems.   "As the economy shows signs of fundamental improvement and volatility recedes, we expect the global M&A market will become more vibrant," continued Curragh.

How accurate was the PwC Transaction Services 2010 M&A forecast?*

Strategic Deals and 'mergers of productivity' will drive activity in 2010.

Correct. In 2010, companies focused on synergies to enhance productivity and cost-savings. For 2011, PwC contends that a different focus on 'productivity' will be a theme as companies look to bolster revenue growth, versus focus on synergies.

We expect to see more IPOs coming to market from private equity.

Correct. Private equity (financial sponsor) backed offerings led the IPO market recovery in 2010, with a total of 115 offerings raising $15.9 billion in the first nine months of 2010, according to PwC's IPO Watch.  "The climate for private equity-backed IPOs in 2010 was robust and we expect this trend to continue," said PwC's Hartnett, "however the IPO market is not the only avenue for PE to realize investments, with sales to strategics and dividends also becoming attractive alternatives."

Financing will be the dominant challenge contributing to the instability of middle market deals.

Partially correct. Debt markets improved in the second half of 2010 as seen in the return of the bank loan market and revival of leveraged finance.

Divestitures will be a factor in fueling deals.

Correct.  Divestitures, e.g. carve-outs, were a factor in driving activity, principally in the middle market, as both seller's valuations and buyer's access to financing improved.  This trend was highlighted by an increase in total divestiture value to $264 billion for year to date November 2010, compared with $241 billion for calendar year 2009, and an increase in divestiture deal value as a percentage of total M&A from 33 percent to 39 percent, an overall increase of 6 percent.

Consumer products, Technology, Energy, Financial Services, Automotive, Healthcare, and Entertainment & Media industry sectors will present opportunities for consolidation.

Partially correct. Financial Services and Healthcare M&A activity was not as strong as expected with a sizeable decrease in both deal value and volume, year on year. Automotive deal activity remained relatively flat in 2010, as companies continued to strengthen their balance sheets before re-entering the deal market.  

*The accuracy of the PwC Transaction Services previous forecast does not guarantee future accuracy.

For further insight on the outlook for the M&A landscape in 2011, join PwC's Transaction Services webcast on Thursday, December 9th at 1:00 p.m. E.T.  To register, visit:

PwC's Transaction Services practice provides due diligence for M&A transactions, along with advice on M&A strategy and integration, restructuring, divestitures and separation, valuations. With approximately 1,000 deal professionals in 16 cities in the United States, and a global network of over 6,000 deal professionals in 90 countries, experienced teams are deployed with deep industry and local market knowledge and technical experience tailored to each client's situation. The Transaction Services team can be involved from strategy to integration and employ an integrated business approach to uncover the realities of a deal. The field-proven, globally consistent, controlled deal process helps clients minimize their risks, progress with the right deals, and capture value both at the deal table and after the deal closes. For more information about M&A and related PwC services, please visit:  

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