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GLOBAL M&A IN CHANGING TIMES
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GLOBAL M&A IN CHANGING TIMES

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As the exclusive research partner by Econique, Aranca made a presentation on “Global M&A in Changing Times.” Amith Karan, Director, Business Development & Strategy, Aranca, talked about how the M&A …

As the exclusive research partner by Econique, Aranca made a presentation on “Global M&A in Changing Times.” Amith Karan, Director, Business Development & Strategy, Aranca, talked about how the M&A activity progressed during 2003-07 before the liquidity-fueled buying frenzy took over, and what contributed to sudden drop in the deals in 2008, and how the future is likely to pan out. “Taking stock in January 2010 about how the M&A activity made modest recovery in 2009 and what lies ahead, was the best way to start,” said Karan.

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  • 1. ARANCA PRESENTATION ON GLOBAL M&A IN CHANGING TIMES Presented at the Econique Global M&A Masters 2010 London, January 25-26, 2010 Confidential | This material is exclusive property of Aranca. No part of this presentation may be used, modified or shared without explicit permission of Aranca. © 2010, Aranca. All rights reserved. www.aranca.com ▪ london ▪ new york ▪ san francisco ▪ brussels ▪ mumbai
  • 2. Aranca: An introduction Six +   … of global research experience with offices in San Francisco, New York, … of global research experience with offices in San Francisco, New York, Years London, Brussels & Mumbai London, Brussels & Mumbai …focused on high end research across four complementary lines of business …focused on high end research across four complementary lines of business 400 + … across the globe including mid-size and large Corporates, law firms, PE/VC … across the globe including mid-size and large Corporates, law firms, PE/VC clients firms, consulting firms, I-Banks, fund managers, IRPs firms, consulting firms, I-Banks, fund managers, IRPs 200 + … including Engineers, PhDs, MBAs, CAs, CFAs from reputed institutes as … including Engineers, PhDs, MBAs, CAs, CFAs from reputed institutes as team Analysts Analysts 80 + … researched across geographies, covering 2000+ companies … researched across geographies, covering 2000+ companies sectors 1 www.aranca.com
  • 3. Recognized as a leading provider of high end knowledge services KPMG Report on Knowledge Process KPMG Report on Knowledge Process Featured as one of the leading Indian players providing research and Outsourcing, Feb 2008 Outsourcing, Feb 2008 analytics services to global institutions Featured as one of six leading providers of offshore research, in a study Invest Australia Report, Feb 2006 Invest Australia Report, Feb 2006 conducted by the Government of Australia Management and analysts featured across media platforms including BBC, Media coverage Media coverage CNBC, Reuters, Economic Times and Business Standard Partnerships Partnerships Appointed knowledge partner by leading global publishers such as CMP Media www.aranca.com
  • 4. Aranca : Four complementary research lines INVESTMENT BUSINESS VALUATION PATENT / IP1 RESEARCH RESEARCH SERVICES RESEARCH Equity research Entry strategy Business appraisal Landscape analysis SERVICE  Credit research Market Intelligence Business modeling Novelty Search OFFERINGS Economic Research Industry analysis Fairness Opinions Benchmarking M&A Analytics Business Plans Due diligence Licensing Investment banks Corporates PE / VC firms Tech companies CLIENT  Hedge funds PE / VC firms Privately held cos Start-up firms PROFILE Corporate Finance Consulting firms Corporates Law Firms IRPs Law firms Cycladic Capital Marsh McLennan Portfolio companies Exponent PE Natixis Bank Bain & Co of Warburg Pincus, Chakshu Research ARANCA  Ascend Capital Reuters Kleiner Perkins, RPX Corporation CLIENTS Silverlake Partners Walt Disney Accel Partners and Other hedge funds Rockwell Collins others 1- Intellectual Property Research 3 3 www.aranca.com
  • 5. January 2010:  No better time to take stock on M&A  4
  • 6. A peek into the past ‐ Post 2003 deal making grew hotter, reaching a frenzy in 2007 Growth in M&A deals between 2003 and 2007 100.0 5.6 # of Deals ('000) Total Deal Value (USD Tn) 80.0 60.0 2.4 40.0 1.9 1.4 0.9 20.0 0.0 2003 2004 2005 2006 2007 Source : Zephyr report, MergerStat 2009 5
  • 7. Key factors contributed to this deal boom ‐ notably growing corporate profit pools … US Corporate profit  share of GDP , % US Corporate Profit as % of GDP 12.0% 11.5% 11.0% With strong economic 10.5% growth, US Corporate profits as % of GDP in 2006 touched 12%, the 8.8% highest levels since the 1960’s 2003 2004 2005 2006 2007 Source : US Bureau of Economic analysis, BCG Research 6
  • 8. … and the rush for consolidation Industry consolidation as share of  total deals, % 71.4 The Rush for consolidation by Corporates intensified and 48.7 BCG estimates that conslidation deals shot up between 2000 and 2006 from 48.7 to 71.4% 1999-2000 2006 Source : US Bureau of Economic analysis, BCG Research 7
  • 9. Private Equity also played its part and PE deals grew exponentially from 2003 Private Equity deal volume and share  of total deal volume  Private Equity deal value and share of total deal value 1,000 850 . 700 550 . 400 250 100 2003 2004 2005 2006 2007 Total value of PE deals (US$ Bn) Source :, Zephyr data published by BvD 8
  • 10. As a result PE deals grew to ~ 25% of deal value at the peak Private Equity deal volume and share  of total deal volume  Private Equity deal value and share of total deal value 1,000 850 30.0% 700 550 20.0% 400 250 100 10.0% 2003 2004 2005 2006 2007 Total value of PE deals (US$ Bn) Share of total M&A deal value Source :, Zephyr data published by BvD 9
  • 11. In the downturn,  total M&A deal value declined by 35% from its peak in 2007  Declining Deal Volume and value in downturn 100.0 5.6 -35% 80.0 4.2 3.6 60.0 2.4 40.0 1.9 1.4 0.9 20.0 0.0 2003 2004 2005 2006 2007 2008 2009 # of Deals ('000) Total Deal Value (USD Tn) Source : Zephyr published by BvD , MergerStat 2009 10
  • 12. To a great extent this was driven by declining deal size which reduced  30% from 2007 to  2009 Avg Deal Size (US$ Mn) 286.4 267.0 244.1 212.3 177.1 183.9 132.1 2003 2004 2005 2006 2007 2008 2009 Source : Bloomberg 11
  • 13. But in this downturn,  M&A is proving resilient 12 www.aranca.com
  • 14. Private Equity clearly had a great fall.. Private Equity share of M&A deals by volume Private Equity share of M&A deals by value 5,500 14.0% 1,000 40.0% 5,000 12.0% 35.0% 850 4,500 30.0% 10.0% 700 4,000 25.0% 8.0% 3,500 550 20.0% 6.0% 3,000 15.0% 400 4.0% 2,500 10.0% 2.0% 250 2,000 5.0% 1,500 0.0% 100 0.0% 2006 2007 2008 2009 2006 2007 2008 2009 # of PE Deals Share of total M&A deals (%) Total value of PE deals (US$ Bn) Share of total M&A deal value In 2007 volume share was ~7% and value share at 16% while in 2009, volume  and value share fell under 5% suggesting that the large value deals  disappeared Source : BCG Research, Zephyr published by BvD 13
  • 15. and if we look at M&A deals excluding PE, the fall in total deal value was less dramatic M&A Deals (including PE Deals) M&A Deals (excluding PE Deals) 5.6 4.7 80.0 -35% 80.0 -17% 3.9 4.2 3.5 60.0 60.0 3.6 40.0 40.0 20.0 20.0 0.0 0.0 2007 2008 2009 2007 2008 2009 # of Deals ('000) Total Deal Value (USD Tn) # of Deals ('000) Total Deal Value (USD Tn) Source : BCG Research, Zephyr published by BvD 14 www.aranca.com
  • 16. Also if we adjust for market capitalisation loss, the fall in M&A deals becomes even less Source : McKinsey research 15 www.aranca.com
  • 17. Europe  appears to have the steepest fall while Asia and the US  were more stable  suggesting that the decline was not universal… Global M&A Deal Volume - Excluding PE ('000) Global M&A Deal Value - Excluding PE ($ B) 0 10 20 30 40 0 500 1,000 1,500 2,000 2,500 Europe Europe Americas Americas Asia  Asia  Pacific Pacific Others Others 2007 2008 2009 2007 2008 2009 Source : Zephyr published by BvD 16 www.aranca.com
  • 18. We need to take M&A in the downturn in context The recession started since Dec ‘07; deepened with waning of ‘Animal Spirits’ as aggregate demand fell severely and valuations were seen as high The fall of Lehman Brothers froze credit markets making debt raising difficult for M&A activity PE deals collapsed from 20% of total deal value to <5% Climate of “worst recession” since depression led to extreme caution among dealmakers Stock market plunged to lowest levels in Mar ’09 due to de-leveraging that took place adding to uncertainty www.aranca.com
  • 19. So what factors are likely to  shape M&A going forward? 18 www.aranca.com
  • 20. Q4 2009 saw a bounce in M&A suggesting and uptick in sentiment Increasing M&A in Q4 2009 25.0 1.3 Total Deals in North America, Europe & Asia Pacific 20.0 1.0 1.0 0.9 15.0 0.8 0.8 Q4 deal value twice the average of  0.6 0.5 previous 3 quarters 10.0 5.0 0.0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 # of Deals ('000) Total Deal Value (USD Bn) Select deals announced / started Comcast to acquire 51% controlling stake in NBC for $30 B HP’s acquisition of 3Com for $2.7 B in November Kraft’s recently revised bid of $19.6 B for UK-based Cadbury Pfizer’s acquisition of Wyeth, Inc. for $68 B in October. Source : Zephyr published by BvD 19 www.aranca.com
  • 21. Q4 2009 M&A offers some interesting insights on the emerging trends Europe bounced back contributing 51% of deal value  Cash component in deals declined from 80% to  vs. the conventional share 71% over the year 1,400.0 Total Deal Value ($Bn) 1,200.0 Break of Known Deal Value by Consideration North America Europe Asia Pacific 100% 1,000.0 800.0 Cash 80% 600.0 Stock 60% 400.0 40% Others 200.0 20% 0.0 0% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 4Q08 1Q09 2Q09 3Q09 4Q09 Private Equity deals which plunged  Falling deal premiums suggest improved  consistently; also picked up valuations PE Deals in North America, Europe & Asia Pacific 1500.0 99.1 Premium on Known Deals 1200.0 60 67.2 31.5% 30.4% 900.0 61.5 28.9% 50 27.1% 54.0 40 600.0 33.4 30.2 14.7% 30 24.4 20.8 20 300.0 10 0.0 - 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 4Q08 1Q09 2Q09 3Q09 4Q09 # of Deals ('000) Total Deal Value (USD Bn) Average Premium (USD M) Average Premium (%) Source : Zephyr published by BvD , Bloomberg 20 www.aranca.com
  • 22. Valuations are still moderately attractive, if not compelling 35 1,600 P/E Ratio Price 1,500 30 1,400 Valuations still quite attractive 1,300 compared to 2007 levels 25 1,200 1,100 20 1,000 900 15 800 700 10 600 Source : Bloomberg 21 www.aranca.com
  • 23. Cross border deals especially in growth markets still seen as key… 7.0 41% 6.0 35% 5.0 28% 29% 29% 29% 25% 25% 4.0 23% 3.0 2.0 1.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total Deal Value (USD Tn) % of Cross Border Deals Source : McKinsey Quarterly 22 www.aranca.com
  • 24. … and Asia’s share of deals has grown dramatically over the years and is likely to continue 45% 46% 46% 42% 40% 49% 47% 58% 56% 39% 41% 38% 40% 37% 38% 39% 33% 32% 13% 15% 16% 16% 15% 19% 19% 9% 12% 2000 2001 2002 2003 2004 2005 2006 2007 2008 Asia Pacific Europe Americas Source : McKinsey Quarterly 23 www.aranca.com
  • 25. Emerging markets gaining strength  and are set to  flex muscles 800 BOVESPA NSE HANG SENG SSE S&P 500 700 600 500 400 300 200 100 0 Source : Bloomberg 24 www.aranca.com
  • 26. BRIC deal examples RIL’s plans to acquire US-based chemical giant LyondellBasell – if successful, will result in biggest M&A deal for an Indian Company. Bid may be of more than $13 billion Bharati Telecom Acquired 70% stake in Bangladesh based Warid Telephone for ~ $1billion The Oil and Natural Gas Corp took control of Imperial Energy Plc for $2.8 billion, in January 2009 Yanzhou Coal Mining Co has got approval from Australian government for its A$3.5 billion ($3.2 billion) takeover of Felix Resources Ltd Xi´an Aircraft Industry Company (XAC), part of China's AVIC consortium got ownership of FACC, a supplier of composite components based in Ried, Austria, Source : Bloomberg 25 www.aranca.com
  • 27. Other factors likely to shape M&A Private Equity will be back - still has USD 500 billion to invest* Pressure to do deals is high once the trend begins. Corporates with strong cash positions will look to jump in There will be financially distressed companies looking to sell part or whole businesses at better valuations Credit markets are loosening up, though not anywhere near 2007 levels 26 www.aranca.com
  • 28. Factors to consider for  M&A in the future 27 www.aranca.com
  • 29. Factors to consider for M&A 2010 Proactively identify opportunities whether looking at growth or value Need to move quickly in downturns - McKinsey estimates that the average time from deal announcement to completion has declined from 130 days (1995-07 avg.) to 60 days in 2008 Due diligence needs to be targeted and focused on key issues to move quickly Need to be creative both in identifying opportunities and in structuring deals Post-merger integration needs strong execution not just good planning www.aranca.com
  • 30. www.aranca.com info@aranca.com MUMBAI 4th Floor, Rushabh Chambers Makwana Road Off Marol Maroshi Road Andheri (E), Mumbai 400 059 +91 (22) 4005 2215 NEW YORK 275 Madison Avenue 6th Floor New York NY 10016 +1 212 878 8826 LONDON 93-95, Gloucester Place London W1U 6JQ +44 (0) 207 487 8214 BRUSSELS +32 487 983 033 SAN FRANCISCO +1 408 732 6735 © 2010, Aranca. All rights reserved.