December 15, 2015
By Martyn Curragh and Neil Dhar
After two years of very strong U.S. M&A activity, deals continue to get done at a feverish pace and are reaching sky-high values. Through the first 11 months of the year, there were more than 10,000 announced U.S. deals for a total deal value of over $2 trillion – the highest on record – and the recent frenzy of megadeal (deals valued over $5B) activity points toward a continued extension of the M&A bull run. A low growth environment coupled with disruptive forces are fueling this hyper mega deal environment momentum going into the New Year.
Corporate America is in a feeding frenzy for high quality assets. Long standing competitors are now combining for increased scale and domination. Record breaking deal values are happening as a result – this is the first time on record that two deals valued over $100 billion have been announced in a 12 month span – the Allergan and Pfizer merger worth $160 billion and Anheuser-Busch InBev’s $105 billion deal for SABMiller. There was a record number of mega deals in 2015 – 65 percent of all deal values were counted as mega deals with 15 getting past the $25 billion mark.
In this environment, not only does scale matter, so does staying relevant. That is leading companies to place big, bold bets on deals that improve their long term growth prospects. In 2015, we saw corporates pay big bucks for opportunities to gain new customers and adapt to changing consumer habits. The $65 billion merger of Dell and EMC supports the recent trend of customers moving to the cloud. Expedia’s acquisition of Orbitz and HomeAway is an example of focusing on consumers who prefer to stay in urban environments and traditional hotel spaces. In an era where growth is challenged and competition is relentless, there is a heightened recognition that if you don’t transform, scale and evolve, growth will be non-existent.
Back to the Future – Big Bets on the Core
Conglomerates are more willing today to transform themselves into pure play businesses that can more aggressively compete and drive value for shareholders. Corporates are ridding themselves of businesses and assets that are better suited in the hands of other operators. General Electric’s move to shed its $500 billion GE Capital business is a prime example of going back to the future of its core business. The drive to refocus is two-fold – pressure from the new asset class of activist investors to unlock value and the need to invest in businesses that have the best prospects. That’s why we will continue to see organizations across industries turn to large-scale M&A and divestitures to get there.
The mega deal frenzy and the surge in valuations has kept private equity focused on add-on acquisitions (over 60 percent of PE activity) and transactions valued at $25 million and below (merely 50 percent of all PE Deals). As a result, PE had only eight percent ($171 billion) of total U.S. deal value but volume held steady at 18 percent (1,905 transactions). Going forward, distressed opportunities in Energy, and continued interest and proliferation of funds in Technology can be expected to continue to drive PE deal activity in these sectors.
IPO Slow Down
Investor appetite for richly valued IPOs showed signs of slowing and highly anticipated market debuts were scaled back, especially with new issuers in the technology sector. Market volatility was the key factor behind a slower IPO market, which saw 195 IPOs worth $33.2 billion, down 60 percent in value compared to last year. While there were number of IPOs that have postponed their debuts in the second half of the year – LoanDepot, Neiman Marcus and Albertsons – we expect IPO market to pick up in 2016 as investors become more comfortable with a “normal” level of market volatility.
Looking ahead to 2016, while there is risk of the anticipated interest rate increases and tightening credit markets to damper deal activity, we expect the deal frenzy to continue as the following market conditions will likely shape activity in the New Year:
- Megadeal activity will continue and more traditional and emerging models will converge to maintain competitiveness.
- Strategic alliances will ramp up, especially related to cross-border transactions.
- Private equity buy-side activity will remain increasingly focused on alternative ways to deploy capital and become a solution for companies beyond traditional buyouts.
- Shareholder activism is the new norm. The C-suite becoming more proactive on portfolio reviews in addition to divestitures will be part of that outcome.
- Technology, pharma and life sciences, and industrial products will remain very active, leading the bulls going into 2016.
- IPOs will pick up despite valuations coming down slightly as investors look to rationalize private valuations with public.
Companies will have to source deals to meet their growth targets and relieve pressures from shareholders and new competitors. The markets have and will continue to reward companies for doing smart, strategic deals, demonstrating that the right transactions are a critical component to growth.
Our team will discuss the above drivers of deal activity in more detail during our Year-End Deals Outlook for 2016 webcast taking place Friday, December 18 at 1:00 pm ET. For more details and to register please go to http://pwc.to/1RR2FFw.