Following the biggest dollar year ever for mergers and acquisition (M&A) transactions in 2015, an overwhelming 87 per cent of executives at US corporations and private equity firms predict their organisations' deal volume will continue, or even increase in 2016.
That’s according to the findings of the third annual "Deloitte M&A Trends Report, which reveals that this positive market sentiment is despite the 40 per cent drop in US deal volume in the first quarter of 2016, compared to the first quarter of 2015.
That lacklustre start to the year, however, likely helped identify ongoing areas of concern for survey respondents. Global economic uncertainty (32 per cent of corporate respondents, 26 per cent of private equity respondents) was ranked most likely to impact deal pursuit, financing and closing in the next 12 months. For the first time in the history of the survey, economic conditions also ranked as most important determinant of deal success among both corporate executives (31 per cent, up from 25 per cent in 2015) and private equity respondents (37 per cent, up from 28 per cent in 2015). Notably, few respondents (14 per cent of corporate respondents, 16 per cent of private equity respondents) ranked the 2016 U.S. elections as most likely to influence deal making in the coming year.
"While still decidedly bullish on the M&A market for 2016, the results also show some creeping issues that could temper this optimism," says Russell Thomson, managing partner of Deloitte's US merger and acquisitions services practice. "For example, although half of private equity investors anticipate an increased number of deals this year, that's notably less than the 61 per cent that foresaw an increase in activity in our 2015 survey. The first quarter's numbers for deal flow indicate that despite a continued focus on M&A, both corporate and private equity executives may have taken more time to gauge opportunities, assessing the economic climate and other factors before making their moves."
The annual Deloitte M&A Trends Report provides insights and year-to-year data on anticipated M&A activity, deal dynamics, top sectors and geographies, as well as the factors driving corporate and private equity deal makers as they come off a record-breaking year for M&A. This year's survey results revealed increases in smaller strategic deals and divestitures, as well as continued appetite for cross-border opportunities, and the use of data analytics.
Nearly two-thirds (63 per cent) of corporate respondents and half (50 per cent) of private equity investors reported completing deals below USD250 million in a typical year. Deal values were most frequently below USD100 million (45 per cent of corporate respondents; 27 per cent of private equity respondents).
Seeking smaller strategic deals remains the No1 M&A strategy for corporate respondents in the coming year (34 percent) for the third year in a row. Corporate respondents expect the average value of their organisations' acquisition targets in the next 12 months to be USD500 million or under (61 percent), while more than half (55 percent) of private equity respondents expect average target value in the coming year to range from USD100 million to USD1 billion. This is consistent with private equity clients also looking to do more add-on acquisitions this year.
M&A executives expect more divestiture activity in 2016 – a trend fuelled by a greater focus on core business activities and reactions to marketplace changes. More than half of corporate respondents (52 percent) expect their companies to pursue divestitures over the next 12 months – a significant rise from 39 per cent just one year ago. Shedding non-core assets (33 percent) continues to be the top reason corporate respondents offer for divesting a business. Financing needs (26 percent) and market change (25 percent) also continue to be important factors for companies pursuing divestitures. The challenging IPO markets are likely further driving the divestiture momentum for both private equity and corporates.
For the third consecutive year, technology is the sector expected to be most active for M&A by both corporate (26 percent) and private equity (25 per cent) respondents during the next 12 months. Beyond tech, corporate respondents expect oil and gas (22 per cent) and health care (16 per cent) to remain hot during the coming year. Private equity respondents say banking and securities (19 per cent) will be next busiest in M&A over the next 12 months.
Thomson adds: "The convergence of technology across industries is adding a new dimension to deal making. For instance, banks are working to deepen their capabilities by acquiring financial technology firms, automobile companies have turned their attention to connected vehicles, and similar activity is happening in health care. As sectors converge with technology, the strong impacts these deals have on financial markets will continue, and analysing deal activity will need to evolve to account for the new hybrid sectors emerging."
Despite heightened global economic uncertainty focused on China, Europe and certain commodity driven markets, M&A executives continue to indicate a solid desire to pursue foreign deals. Three-quarters of corporate respondents said their companies' M&A activity involved acquisition of targets operating principally in foreign markets.
The top three overseas markets in which both corporate executives and private equity investors plan to pursue deals are: China, Canada and the United Kingdom.
There continues to be an increase in corporations and private equity firms turning to data analytics as a key to M&A decision making, providing important insights about financials, customers, markets, sales, cost saving opportunities and personnel. More than 7 in 10 corporate (72 per cent) and private equity (74 per cent) respondents say they use data analytics, with 31 per cent of corporate respondents and 37 per cent of private equity investors citing analytics as part of their core M&A strategy.
The most frequently noted impediment to using data analytics is complexity (29 per cent of corporate respondents, 27 per cent of private equity respondents), followed by the time required for analysis (21 per cent of corporate respondents, 22 per cent of private equity respondents).
The M&A trends report showed a significant increase in the share of recent deals that did not meet expectations. Forty-eight per cent of corporate respondents said more than half of their acquisitions over the past two years did not generate expected returns. The main reasons transactions failed to generate expected value for the past two years were gaps in execution and integration (23 per cent of corporate respondents, 26 per cent of private equity respondents).
"On the heels of a record-breaking 2015, the outlook for M&A remains favourable due to a number of converging factors, including a reasonably solid US economy, historically low interest rates and equity markets that are stabilising," says Thomson. "But, the slow M&A start to 2016 reinforces that there are a number of factors emerging in 2016 that should be closely watched, including global economic concerns, bouts of financial market volatility, tighter traditional debt markets and regulatory pressures. While we are seeing significant interest and enthusiasm across both corporates and PE firms, and I suspect 2016 will be a tale of two halves, with improvement after a softer start, we will have to wait and see."
