Strong momentum in the merger and acquisition (M&A) market during the second half of 2013 is expected to continue into 2014, according to PwC US.
Improved stability and early signs of growth in other key global markets have contributed to an increasing level of business confidence and sharpening focus on finding opportunities for growth, setting the stage for positive M&A momentum, according to PwC’s year-end M&A outlook.
PwC notes that the average monthly deal volume continued to pick up through the latter part of 2013. According to data compiled by Thomson Reuters and analysed by PwC, average monthly deal volume increased by 10 per cent from 808 deals per month in the first six months of 2013 to 886 deals per month from July through November.
“The improved macroeconomic environment and solid fundamentals for deal making in the US that have been in place over the past two years have increased the level of business confidence in the market, fostering continued M&A activity in 2013,” says Martyn Curragh, PwC's US deals leader. “Dealmakers have also looked to opportunities in the debt market to recapitalise and monetise existing investments, demonstrating the importance of evaluating the range of scenarios available today. Given our pipeline of deals and today’s strong debt and equity markets, which help fuel divestitures and exits, we expect that M&A momentum to continue into next year.”
Through the first 11 months of 2013, there were a total of 9,280 transactions representing USD944bn in disclosed deal value. The first quarter of 2013 started off strongly, largely as a result of several “transformative” deals (transactions worth more than USD5bn) in February. In that month alone, 695 deals for a total value of USD152bn were announced, the highest since October 2011. Transformative deals accounted for 35 per cent of total disclosed deal value in 2013, up from 24 per cent last year.
“While transformative deals present businesses with great upside potential, they also carry greater risks and uncertainty due to the size and complexity of the transaction,” says Curragh. “With this uptick in transformative deals, our clients are focused on navigating potential pitfalls by addressing the long term fundamentals of the business, allowing them to go deeper and broader in their deal assessments.”
Average debt to EBITDA multiples continue to steadily increase, reaching 4.5x as of November 2013, according to S&P Capital IQ LCD. This, coupled with attractive terms and availability, provide corporations and private equity firms with options to refinance and pursue liquidity events, while fuelling M&A activity and supporting an increase in valuations. A comparison of forward and trailing multiples indicates buyers are projecting significant year-over-year growth in EBITDA, and a greater willingness to embrace growth forecasts.
“There is a high level of optionality for dealmakers in today’s market. Dealmakers who seek to capitalise on this dynamic deal environment are continuing to evaluate the best available options. At the same time, they are taking a much more disciplined, thorough approach in preparing to execute on quality deals that have the highest potential for long term value creation,” says Curragh. “While the executive interest in executing deals remains strong, the patient focus on executing deals well dominates today’s market. Unless we see a significant change in the macroeconomic trend, which creates a downward shift in the direction of the equity and debt markets, or an increase in the level of political uncertainty, deal fundamentals and the desire to grow revenues and boost bottom lines continue to point to sustained M&A activity going forward.”
Outbound deal activity US outbound transaction volumes have been on a decline since 2011, partly due to relative stability of the US economy, slowed growth rates in China, and weaker than expected economic performance in Brazil and India. However, this trend may reverse in 2014 as economic certainty in key developed markets such as Europe begins to take foothold. Additionally, as US investors, including private equity firms, domestic corporations and multinationals look for new ways to grow and meet their strategic objectives, and as dealmakers find value in expanding their M&A efforts to international targets, PwC expects an ongoing shift in the expansion to mature markets.
Private equity transactions accounted for 17 per cent of total deal value as of November, representing USD163bn worth of disclosed transactions.
“Private equity investors have been in a position to take advantage of the debt markets to recapitalise their companies and create liquidity for their investors while building strong long-term businesses,” says Andrew Cristinzio, PwC’s US private equity leader. “Like corporate buyers and sellers, private equity firms have several options on the table for liquidity and have been strategic in deploying new capital in an environment where there is demand for quality assets.”
Divestiture activity remained steady at 30 per cent as a percentage of overall deal activity, consistent with the past two years. According to PwC, divestiture activity should continue across most industries as more corporate sellers reduce the size of their portfolios to focus on the assets that matter most to their growth strategies. In an effort to maximize value during the sale process, PwC has seen a continued trend toward greater seller preparation, and expects this will become the norm during the divestiture process.
“As sellers look to command greater valuations for their assets, buyers’ expectations for high performing businesses are increasing, driving a greater need for confidence on the worthiness of any given deal,” says Curragh.