Pw C Ts Mid Year M&A Forecast Release 06.23.10
1. PricewaterhouseCoopers LLP
300 Madison Avenue
New York NY 10017
Telephone (646) 471 4000
Facsimile (646) 471 4100
CONTACTS: Jo Anne Barrameda Kathryn Oliver
Brainerd Communicators, Inc. PricewaterhouseCoopers
barrameda@braincomm.com kathryn.oliver@us.pwc.com
(212) 986-6667 (860) 345-3550
PricewaterhouseCoopers Outlook
While Large Cap Transactions Remain Challenged For Second Half,
Looming Tax Increases Will Light Fire under Middle Market
Merger & Acquisition Activity , according to PricewaterhouseCoopers
Strategic Buyers Demonstrate Deal Expertise in Opportunistic Plays
Financial Sponsors Continue to Invest in Distressed
NEW YORK – JUNE 23, 2010 – Despite earlier improvements in credit and equity markets
and corporate balance sheets, U.S. merger and acquisition (M&A) activity remained sluggish
in the first half of 2010. Unforeseen economic events in the last two months triggered a
global ripple effect reviving sentiments of uncertainty – setting the stage for a challenging
M&A environment for large cap transactions in the second half, according to the Transaction
Services practice at PricewaterhouseCoopers, LLP (PwC). However, PwC contends that the
middle market may be a different story.
“Going into the second half, record dry powder in the private equity space and unprecedented
cash levels on the balance sheets of corporate America will combine with the desire of family
held businesses and private equity backed management teams to sell prior to looming tax
increases,” says Bob Filek, partner with PricewaterhouseCoopers’ Transaction Services.
U.S. M&A activity was down three percent compared with the same period in 2009. The
number of closed deals in the first half of 2010 represents the lowest deal volume this decade,
according to PwC. For the first five months of 2010, there were 2,969 closed deals
representing $317 billion, compared with 3,065 deals valued at $323 billion in the same
period of 2009.
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2. Five months comparison: Value of announced US transactions
($ in billions)
800 700
677 598
600
394 449
400 364
323 317
168 160 37%
35%
200 16% 27% 24%
13% 21% 11%
19% 30%
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Private Equity Corporate % Private equity to total US
Source: Thomson Reuters
Five months comparison: Volume of announced US transactions
(# of deals)
4,754
5,000 4,369
4,223
3,716 3,675 3,824
4,000 3,114
3,069 3,065 2,969
3,000
2,000
19%
13% 15% 17% 17% 17% 16% 17%
1,000 21% 20%
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Private Equity Corporate % Private equity to total US
Source: Thomson Reuters
While deal value and volume are down, willing lenders and open credits markets are
available for transactions, according to PwC. “Banks and institutions are providing capital to
execute deals,” says Greg Peterson, partner with PricewaterhouseCoopers’ Transaction
Services. “They are lending more conservatively , but credit is available from a variety of
sources and in a variety of types – including traditional leveraged loans.”
Corporate buyers continue to employ strategic deal making, pursing attractively valued
companies and seekin g out ‘mergers of productivity’ as a means to capture benefits of scale
and cost savings , maintains Filek. “Companies are taking advantage of depressed valuations
– looking for deals to grow and diversify at discounted prices. Even with the uncertainty in
Europe, a hesitant consumer and volatile markets , it’s still an attractive time to buy.”
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3. The median deal size in the first half was $107 million, indicating that smaller, middle market
deals have become the new ‘normal.’ “While there is still ambition t o complete mega deals,
the ‘hit rate’ will be low. The sweet spot for deals will be one to five billion dollars and
below, with a mega deal or two sprinkled in ,” says PwC’s Peterson.
PwC expects divestitures, carve-outs and spin-offs to continue to contribute to deal activity as
companies separate certain assets and operations no longer seen as core to the business. The
likely candidates to acquire these assets are private equity players who have strong
relationships with large corporations that may be interested in selling certain assets. Business
units within the industrial products and technology sectors are among the industries where
PwC expects to see increased divestiture activity.
“Private equity players will also remain active in the distressed area, using their debt, hedge
and distressed funds to find deals in untraditional ways,” continues Peterson. “While there
are concerns about stricter regulation for certain alternative investment classes, private
equity is a resilient and innovative business run by sophisticated investors who will still get
deals done, regardless of what transpires in Washington.”
The current private equity overhang at nearly $850 billion (three and a half times the
overhang in 2000) represents 54% of all capital commitments made between 2004 and 2009.
Over 85% of the $850 billion is in funds larger than $1 billion, including 48% in funds larger
than $5 billion, according to Cambridge Associates.
Declining values of the Euro and Pound are also providing a strong backdrop for cross-border
deals, particularly in Europe. “Typically, during U.S. downturns, European companies take
advantage of a poor U.S. economy, but this time, foreign buyers have to deal with issues at
home, including a challenging financing market, reduced demand and declining currency
values ,” according to PwC’s Filek. “As a result, we expect the inverse to occur. U.S.
corporate s are going to see good opportunities to acquire high quality franchises and brands
in Europe .”
Sectors ripe for consolidation include:
§ Aerospace & Defense – Activity in the security, surveillance and homeland security
sectors are expected to continue as suppliers seek to diversify their offerings and seek
growth areas away from traditional defense budgets. Look for organizational conflict of
interest concerns to drive some activity, with A&D companies evaluating options to exit
such activities through a sales process.
§ Automotive – With crashing 2009 assembly volumes in the rear-view mirror, companies
with strong balance sheets and access to capital are poised to re-enter the deal market.
Over the next three to five years, M&A will be driven by new technologies, regulations
and consumer requirements. T ier one suppliers will work to realign their product
portfolios to take advantage of the restructured industry. Developed markets will focus
on fuel economy, hybrid and electric vehicles and infotainment and communications in
vehicles , while developing markets will focus on delivering low cost vehicles and
acquiring technologies.
§ Entertainment, Media & Communications – Private equity interest remains strong with
new investment in and through platform companies. High-profile acquisitions over the
past several years, as well as numerous middle-market acquisitions, have led private
equity’s interest and influence via platform investments to expand across the E&M
landscape. As private equity investors continue to assess the cyclical and structural issues
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4. within certain E&M subsectors, PwC expects that interest to permeate even further via
bolt-on acquisitions as well as new platform company investments. Additionally, more
traditional, well-capitalized corporates in this space appear to be stabilizing and interested
in potential M&A activity.
§ Financial Services – Until the impact of U.S. financial regulation is fully realized,
uncertainty will be cause for continued stagnation of deals in the sector, other than some
continuing interest in FDIC supported takeovers. However, opportunities exist for
companies to divest non-core assets and consider capital raising alternatives such as debt
or equity raises. Consolidation in the property and casualty insurance is still expected in
light of continued soft pr emium pricing and desire to maximize scale, while life insurance
consolidations will likely continue to be a less active space given returning investment
portfolio valuations and focus on product redesign.
§ Healthcare – As the full impact of U.S. healthcare reform becomes better understood,
look for increased industry M&A and joint venture activity. Consolidation will accelerate
in the services and health insurance/managed care sectors, driven by the need to reduce
costs, increase productivity and develop more integrated business models. Technology
will play an even larger role; and leaders will embrace strategies and innovations that will
lead to more collaboration across all health industry sectors.
§ Oil & Gas – Oil & gas commodity price differential will drive companies to increase
their oil positions through acquisitions. Equipment and service companies will expand
their product and geographic footprint through transactions. The offshore drilling
moratorium will be an obstacle for those highly levered to Gulf of Mexico E&P projects
but will likely not dampen the growing level of transactions in the sector.
§ Power & Utilities – Despite uncertainty surrounding energy policy and regulatory
changes, M&A activity in the sector has been a pleasant surprise, as significant regulated
and merchant company transactions have been announced in the first two quarters of
2010. PwC expects this trend to continue, with a cautious eye towards regulatory
approvals of the announced transactions. IOUs continue to shed non-core assets and
M&A activity remains strong in the renewable space. Expect to see continued sales of
merchant power plants, particularly driven by the current and projected commodity
prices.
§ Retail/Consumer Products – Watch for the strongest sectors to lead the way in
accelerated activity focused on growth. Food and household products companies will
look to expand portfolios and enter emerging markets as a way to boost revenue growth.
Retailers faced with a lackluster U.S. consumer will be focused on business models that
make sense for them in emerging markets. European specialty companies depressed by
the recent downturn could be attractive to opportunistic U.S. buyers.
§ Technology – Record profits and favorable revisions in investors' expectations will drive
M&A as a means of accelerating innovation cycles. The ‘new R&D’ will continue to
drive mid-market transactions. PwC expects software incumbents to round-out offerings
or acquire industry-specific applications and as major hardware players expand into end-
to-end solutions. Look for semiconductor deals to come to the fore as the long-awaited
cyclical rebound begins to take hold. Consumer technology and Internet majors will
continue to work their way along the value chain to capture market and mindshare as
mobile computing, entertainment and communications markets converge on intelligent
and user-friendly devices.
According to PwC, the wild card in the second half will be just how much incentive looming
tax increases give buyers to sell. “The economics could be compelling enough to drive a rush
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