US M&A revival poised to continue

September 2015  |  FEATURE |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Economic recovery in the US, as is in other developed nations, is slowly taking shape. Though it may be a little too slow for some, national GDP is expected to grow at an annual average of around 2.3 percent.

There are likely to be some bumps in the road, such as cyber criminality and increasingly onerous regulatory controls, for example. However, the US economy appears to be stronger today than it has been in some time, and this is reflected in the optimism on show in a new report from PwC, the firm’s 18th annual chief executive officer survey. For the first time in five years, more business leaders in the survey rated the US as their most important market for overseas growth going forward. This is notable as many firms have placed the US ahead of all others nations, including China which has soaked up a considerable amount of FDI of late. Such a vote of confidence at the executive level indicates the burgeoning optimism surrounding the American economy.

Although there is still a considerable way to go, M&A activity in the US is heading in the right direction, according to PwC. The first six months of 2015 saw multibillion dollar deals become more commonplace in the US. Mega deals such as the $55bn merger of Charter and Time Warner made for a busy first half of the year. Between 1 January and 31 May 2015, there were 4654 deals completed in the US for a total of $875bn – up 9 percent on the same period in 2014. And it appears that the market could heat up further in H2. Fifty-four percent of survey respondents noted that they intend to complete an acquisition in 2015.

“CEOs are looking at deals to strategically strengthen and protect their positions in this increasingly competitive marketplace”, wrote Martyn Curragh, a principal and US Deals leader at PwC. “Corporate boards are deploying record amounts of cash to increase returns, and high stock prices are emboldening buyers and sellers. The strong US economy and rising confidence signals a strong finish to 2015, making it another record year for M&A value since 2007 and the doldrums of the financial crisis”.

‘Transformational deals’ – those deals valued at $10bn and above – accounted for a significant portion of H1 deal activity, at 58 percent of total deal volume. Megadeals in the pharma space, such as AbbVie’s $21bn acquisition of rival Pharmacyclis and Pfizer’s $17bn purchase of Hospira, accounted for 17 percent of the period’s total deal value. Pharma transactions in the first six months of the year reached an impressive $150bn. According to PwC, the pharmaceutical sector will continue to feature heavily in the second half of the year, as many pharma companies need to buy or be bought themselves; either way, M&A activity is heating up. Indeed, some of this optimism was almost immediately repaid in July when news emerged of Cancer-drug specialist Celgene Corp’s $7.2bn acquisition of rival Receptos Inc., continuing the multibillion transaction trend.

Continued activity is also expected in the technology space, along with entertainment and media. “Consolidation trends are driving megadeals in semiconductor and within telecommunications and networking equipment”, adds PwC in its survey, citing Avago Technologies’ $37bn acquisition of Broadcom as an example. Valuations in the tech space have been higher than any other industry in the US, as evidenced by Avago’s merger with Broadcom – the largest tech deal since the boom period of the dotcom era. The deal for Broadcom valued the company at 20 times earnings before interest, taxes, depreciation and amortisation.

Volatility in the oil & gas space and fluctuating prices have been a catalyst for significant change over the last 18 months, with projects cancelled, jobs lost and companies filing for bankruptcy on a fairly regular basis. Given the recent precarious nature of the oil & gas sector, M&A activity has declined, although that seems likely to change as oil & gas prices begin to stabilise and the space returns to an even keel. This should provide plenty of opportunities for acquiring firms.

For those companies wishing to complete M&A deals, one of the most important challenges in the marketplace – according to survey respondents – relates to the nature and structure of ownership teams. As a result, companies in the US in the coming months will look to joint ventures and strategic alliances. According to the survey, 44 percent of US based CEOs surveyed plan to enter a new strategic alliance over the next 12 months.

For many advisers, including PwC, the M&A market is just starting to warm up. As a result, the second half of the year could see even more deal activity. Watch this space.

© Financier Worldwide

BY

Richard Summerfield