What’s Driving Deal Activity? The Opportunity to Disrupt or Avoid Disruption

October 26, 2016

By Brian Levy, PwC Deals Industries Leader

Expect more digitally-motivated dealmaking on the horizon

The driving force for dealmakers this year has been the opportunity to disrupt – or avoid disruption – as they are looking to long-term strategic plays that allow them to be the influence for change in their industry. Technology-driven deal momentum (one component of the disruption trend) continues to build, with a larger concentration of multi-billion dollar megadeals being announced each week. Moreover, a number of “non-digital” businesses are picking up tech, software and IT companies – continuing a trend highlighted in our recent research. I’m seeing this trend across sectors – highlighting companies’ increased focus on leveraging technology to energize and transform their existing business. Forward-thinking companies – especially those in product and services industries – are recognizing that having data to enrich the customer experience is only in its infancy.


A Look at the Deal Environment and Key Trends

In the third quarter, there were a total of 2,467 deals valued at $349 billion across industries in the US. Year to date, we’ve seen 8,503 deals valued at $1,128 billion as of September 30. Overall deal volume and value are down 10 percent and 36.5 percent respectively, compared to last year, but the balance of 2016 has maintained a relatively healthy and robust deal market. And keep in mind 2015 is a tough comparison, as it was considered a banner year for deals following several volatile years for dealmaking after the financial crisis.

In fact, I continue to see several megadeals (with values in excess of $5 billion) get announced despite increased antitrust scrutiny from the DOJ, which speaks to the confidence dealmakers have in the US market and the desire to stay ahead of their competitors. Despite general macro-economic and political uncertainty stemming from the US presidential election, Brexit and the Fed rate hike speculation, deal activity largely remains healthy across most sectors. Dealmakers in regulated industries like financial services, healthcare and pharma, aerospace and defense and energy view the election as the first step toward resolving some of these uncertainties.

Resurgence of US IPOs and Capital Markets

With fierce competition for quality assets across the market, valuations have been trending upward, driving premiums to near-record levels. At the same time, stronger equity markets have allowed IPO activity to bounce off the bottom, which has begun to plant a foundation for a more fertile IPO market going forward. This quarter saw a slow but steady return for the once-tepid IPO market during the post-Labor Day rush. With 40 IPOs and $6.6 billion raised in Q3 (and another 14 IPOs raising $2.6 billion as of October 20), US IPO market activity is still short of historical levels. Nevertheless, it’s a welcome increase from the IPO-free first quarter. Year to date, we’ve seen 101 IPOs and $16.8 billion raised. More pricings are in the queue as we head toward 2017 with a healthy, diverse sector pipeline, particularly in technology. In the next two weeks, we expect eight companies to raise an additional $2.8 billion.

Technology in the Driver’s Seat

Based on dealmakers’ increased appetite to continue leveraging technology, I anticipate the demand for cloud services, IoT, artificial intelligence and machine learning technology may contribute to healthy dealmaking across industries in the year ahead, especially in technology and healthcare. These and other emerging technologies are helping to power the ongoing business transformation I see across industries as businesses look to compete amidst disruption over the next decade and beyond. As we enter the final quarter of 2016, I wouldn’t be surprised to see the seeds planted for several more $1B+ deals to drive up overall values, and numerous smaller deals across all sectors, particularly with a technology orientation as the political uncertainty begins to resolve itself.

Q3 Industry Sector Spotlight

My sector teams and I keep a pulse on industry dynamics impacting your business by bringing together insights from across our network on a quarterly basis. Here you’ll find a collection of our latest deals industry reports, and below is a summary of what drove activity across industries in Q3:

Technology, InfoComms, Entertainment (TICE): Technology deal momentum continued to build in Q3 – posting record deal value – due to a large concentration of multi-billion dollar transactions and tech buyers’ intent on securing their position in a dramatically shifting landscape. Technology megadeals nearly tripled from the prior year with 24 megadeals valued at $84.2 billion. Splits and consolidations within and among tech giants have fueled this trend. In entertainment, media and communications, there were seven megadeals in Q3 2016 ($15.3 billion), 23 percent of total deal value for the quarter. As of YTD Sept 2016, there were 18 announced megadeals, higher than any single year since 2011. The driving force behind these deals: consolidation, capabilities extension, innovation and content.

  • US Technology Q3 Deals Snapshot: 347 deals and $102.5B | 11 US IPOs
  • US Entertainment, Media, & Communications Q3 Deals Snapshot: 145 deals and $19.2B | 0 IPOs

Health Industries: As pharma and life sciences industry participants continue to reevaluate their portfolios of assets, deal volumes may trend upwards towards more historical levels for the industry by the end of the year. However, there may continue to be lower total deal value relative to historical levels for the industry, as potential acquirers become more disciplined with deal pricing and look for smaller targets. In health services, conversations around alternative deal structures and alliances continue.

  • US Health Services Q3 Deals Snapshot: 214 deals and $20.0B | 0 IPOs
  • Global Pharmaceuticals & Life Sciences Q3 Deals Snapshot: 90 deals and $42.0B | 12 US IPOs

Retail & Consumer: As the online channel continues to experience strong growth and gain a greater share of the consumer pocketbook, retail and consumer executives are increasingly focused on migrating to lower-cost operating structures that support the changing balance of revenues from retail stores to the online channel, resulting in the outright sale or closing of brick-and-mortar locations. Selling activity among private equity firms will likely increase as they review their portfolios for businesses that they have held for two years or more.

  • US Retail & Consumer Q3 Snapshot: 245 deals and $34.5B | 3 US IPOs

Financial Services: Banking & capital markets deal values, including non-bank deals, rebounded this quarter with approximately one-third of all banking deal value attributed to deals announced in the final week of Q3. Despite significant sector challenges in asset and wealth management, there is potential for increased M&A activity ahead. Accelerating outflows from active asset managers will likely create an environment where many managers will look for acquisitions and mergers to maintain profitability and survive.

  • US Banking & Capital Markets Q3 Deals Snapshot: 89 deals and $10.8B | 4 US IPOs
  • US Asset & Wealth Management Q3 Deals Snapshot: 36 deals and $571M | 6 US IPOs

Energy & Power: The energy and power deals market has reawakened after two tough years, with recent activity driven in part by sellers’ need to pay down debt. Many private equity players are reaching the end of their holding periods and will likely need to divest assets, which could lead to more activity in the near future. Megadeals returned in force, representing 79% of total oil and gas deal value for Q3, and the sector also saw the first oil and gas IPO in more than a year. Activity also increased in the power and utilities industry, with six megadeals driving 95 percent of total deal value for the quarter – and a number of pipeline infrastructure deals, which made up 68 percent of total deal value.

  • US Energy (Oil & Gas) Q3 Snapshot: 47 deals and $56.7B | 1 US IPO
  • North American Power & Utilities Q3 Deals Snapshot: 22 deals and $78.1B | 0 IPOs

Industrial Products: Global industrial manufacturing deal activity significantly outpaced the other industrial sectors in Q3 2016. Companies understand the potential impact of technology disruption to their industry and are responding through M&A activity. Activity is also being driven by a return to core areas, as companies remain focused on portfolio coherence.

  • Global Aerospace & Defense Q3 Deals Snapshot: 11 deals and $6.1B | 0 IPOs
  • Global Chemicals Q3 Deals Snapshot: 23 deals and $18.9B | 1 US IPO
  • Global Engineering & Construction Q3 Deals Snapshot: 66 deals and $25.4B | 1 US IPO
  • Global Industrial Manufacturing Q3 Deals Snapshot: 155 deals and $64.8B | 0 IPOs
  • Global Metals Q3 Deals Snapshot: 19 deals and $11.1B |0 IPOs
  • Global Transportation & Logistics Q3 Deals Snapshot: 50 deals and $26.0B | 0 IPOs

Be sure to stay tuned for our ongoing #PwCDeals Day series in future quarters – and for a deeper dive on your industry’s unique Deals Insights, visit pwc.com/us/deals-industries>



Colin Wittmer

Deals Leader, PwC US Email

Curt Moldenhauer

Deals Solutions Leader, PwC US Tel: +1 (408) 817 5726 Email: curt.moldenhauer@pwc.com