Technology, Power & Utilities, Healthcare Sectors Bright Spots for M&A in a Mixed Landscape, According to Ernst & Young LLP

NEW YORK, June 15, 2011 /PRNewswire/ -- US merger-and-acquisition (M&A) deal value was up 35% during the first half of 2011, compared to the same period last year; however deal volume dropped 4%, demonstrating a return to larger headline deals, but a drop in overall activity, finds Ernst & Young LLP Transaction Advisory Services (TAS).(1) Deal activity for the second half of 2011 should moderately strengthen, with 36% of US businesses looking for new acquisitions in the next six months and 44% planning to execute acquisitions over the next 6-12 months, according to the Ernst & Young Global Capital Confidence Barometer. A portion of this deal activity will be propelled by continued strong emerging market M&A activity. The percentage of companies that said they are considering an emerging market acquisition within the next six months is 50% higher than it was at the end of 2009.(2) In addition, increased divestiture activity will contribute to an uptick in transactions in the second half of the year, as companies look to optimize portfolios and rationalize their capital structures to drive shareholder value. Divestiture activity is expected to rise in the short-term.

Certain sectors, including technology, energy, and healthcare experienced above average levels of deal activity during the first half of 2011, and are poised for a strong second half of the year, according to Rich Jeanneret, Americas Vice-Chair, Transaction Advisory Services at Ernst & Young LLP.

"Deal value is certainly recovering from the lows of 2009, however we have not seen the number of deals we have in the past due to ongoing geopolitical and economic factors," says Jeanneret. "A key priority for almost 50% of businesses is organic growth – nearly double that of 18 months ago with well-capitalized corporates waiting out the market volatility.(3) Going forward we expect companies to look to acquisitions and increase their focus on divestitures as a way to maximize shareholder value, raise capital or generate growth in a period of uneven recovery and market performance. The technology, energy and healthcare sectors are notable exceptions, and we expect to see more M&A in these industries."

Private equity

US private equity (PE) deal value continued a slow rebound in the first half of 2011. Financial sponsors announced 302 deals valued at $37.2 billion during the first half of 2011, a 2% increase in value over the same period in 2010, although the number of deals was down slightly.(4)

"PE firms are chipping away at their significant stores of dry powder, but continue to have ample capital available to fund deals," says Jeffrey Bunder, Ernst & Young's Global Private Equity Leader. "In addition, the credit markets are receptive to PE activity and we've seen a relatively strong exit market over the past six months. Fund-raising continues to be a challenge, and total funds raised are still not back to levels observed in the 2000 to 2008 timeframe."

Technology

US technology M&A got off to a strong start and reached $41.8 billion in the first half of 2011, a 39% increase in value compared to the same period last year, however volume was down 10%.(5) While there were a number of large deals in the semiconductor and disk drive sectors in the first half of 2011 driving value up, smaller sized deal activity was spurred by increased focus on cloud, social networking and smart mobility, and the broader trend of technology integration into all parts of life. The proliferation of semi-conductor deals in 2011 is a significant increase from historical trends. The question is whether this signals the beginning of a broader trend of semiconductor industry consolidation.

"The first half of the year saw companies continuing the trend of making multiple small acquisitions and weaving them together to address strategic business initiatives, including smart mobility, social networking, internet and video technologies and cloud, including software-as-a-service," says Joe Steger, Global Technology Leader for Ernst & Young Transaction Advisory Services. "Expect technology M&A to continue the upward trend that we've witnessed since 2Q 2009 as companies have the cash they need to increase transaction spending. However, we must cool expectations to some extent due to concern over increasing divergence between buyers and sellers over valuations, geopolitical unrest, recent stock market declines, and other market uncertainty."

With the increase in opportunities for both strategic and financial buyers, valuations for tech deals may increase as a consequence of recent IPO activity, valuations of premier social networking and internet companies, and a greater number of competitive bids. However, blockbuster deals will not be the norm, as larger deals are expected to remain between one and ten billion dollars.

Power & utilities

US power & utilities M&A has been a standout in the M&A landscape so far this year, reaching $47 billion in value year-to-date, up 237% over the first half of 2010 at just $14 billion .The number of power & utilities deals also increased significantly compared to the same period last year also, up 55% from 51 deals announced in the first half of 2010 to 79 deal announced so far in 2011.(6)

"Volatile electricity and natural gas prices, massive capital expenditures, lower premiums, lower synergy targets and quicker regulatory approvals are expected to drive US consolidation for the remainder of 2011," says Joseph Fontana, Ernst & Young's Transaction Advisory Services Global Utilities Leader ."We have seen a tremendous uptick in power & utilities M&A as regions look to make massive infrastructure upgrades, and utilities merge for credit-driven reasons."

Healthcare

Up 274% in the US with $21.4 billion announced so far in 2011 compared to only $5.7 billion during the same period in 2010, life sciences (including pharma and biotechnology) are on track for a strong 2011. While value was up significantly, the number of deals announced in life sciences remained flat year over year(7) – a demonstration of the size of the deals that have been announced so far in 2011.

"In life sciences, we're seeing companies increasingly focus on strategically managing capital, which should mean more divestitures to prune their business portfolios. They're also looking to M&A and joint ventures to assemble the right capabilities to deliver better patient outcomes.  We expect both trends will continue through the second half of 2011," says Jeffrey Greene, Global Life Sciences leader for Ernst & Young's Transaction Advisory Services. "As we've seen in recent years, M&A will also be driven by the need to replenish drug pipelines as patents expire with R&D productivity continuing to lag, and by the need to capitalize on higher growth rates in emerging markets."

Provider care deal value is also up having increased 221% in the US, with $55.2 billion in announced deals so far in 2011, compared to just $17.2 billion during the first half of 2010. Deal volume is up 24%.(8) Virtually every healthcare subsector, including hospitals, physician practices, home health and hospice, and managed care, has seen strong activity.

"Healthcare reform will continue to drive activity in 2011 as companies focus on improving quality and reducing costs.  We also expect continued PE interest in the healthcare sector, with PE firms using portfolio companies to make acquisitions or partnering with corporates in transactions to gain valuation advantages through synergistic opportunities," says Chip Clark, Ernst & Young LLP's Americas Transaction Advisory Services Provider Care Sector Leader.

Emerging markets

"While US activity continues its slow recovery since the lows of Q1 2009, emerging markets remain top targets for deal-seeking companies," says Steve Krouskos, Global Markets Leader for Ernst & Young Transaction Advisory Services. "As the developed world continues to be faced by fiscal dampeners, the increased buying power of growing economies makes the emerging market M&A landscape appealing to US companies and emerging-market investors alike."

While emerging markets M&A activity fared exceptionally well in 2010, deal value is lower for the major emerging markets for the first half of 2011 (down 27% year over year).(9) However, as the recovery and growth rate in emerging markets outpaces the developed world, there is no shortage of investor interest in these markets. Deal value in China, for example, is at its highest total for the first half of the year, up to $43.4 billion, since the start of the recession in 2008 and a 38% increase compared to the same period last year. The number of deals for the first half of 2011 in China increased by 18% from 891 deals in the first half of 2010 to 1050 deals so far in 2011.(10)

As the recovery in the developed world remains uneven, emerging markets remain a destination for growth; with emerging economies expected to grow by as much as 6.5% in 2011 compared to a forecasted growth of 2.5% for advanced economies.(11)

"Emerging markets remain incredibly attractive for companies from both developed and emerging markets looking to do deals," says Jeanneret. "Over the next few years, we expect to see more capital flows from emerging market to emerging market, and we will also see new M&A power players surface beyond the BRICs, such as Indonesia, Vietnam, Turkey, South Africa and Korea."

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1) Thomson Reuters, May 31, 2011

2) Ernst & Young Global Capital Confidence Barometer.

3) Ernst & Young Global Capital Confidence Barometer, April 2011

4) Dealogic, May 31, 2011

5) Thomson Reuters, May 31, 2011

6) Thomson Reuters, May 31, 2011

7) Thomson Reuters, May 31, 2011

8) Thomson Reuters, May 31, 2011

9) Thomson Reuters, May 31, 2011; includes Brazil, India, Russia, China, Indonesia, Vietnam, Turkey and South Africa

10) Thomson Reuters, May 31, 2011

11) IMF World Economic Outlook (WEO)

SOURCE Ernst & Young