M&A deal value last year reached record numbers in the US. This year, according to a new study, will be again be a bumper year for transactions, driven by favourable fundamentals, including massive cash reserves and the low cost of borrowing. Particularly the technology and pharmaceutical industry are ripe for activity, with companies seeking to enter new markets and expand their customer base.
2015 was a record year for mergers & acquisitions (M&A). Globally more than 4.7 trillion was invested in M&A on the back of an improving global economy, strong stock market and cash-heavy balance sheets. In a new report, titled ‘U.S. executives on M&A: full speed ahead in 2016’, KPMG delves into the M&A landscape of the US, shedding light on key developments, trends and market expectations. The study is based on more than 550 professionals including chief executive officers, chief financial officers, and managing directors – each of them is either planning M&A activity in 2016 or was engaged in deals over the past three years.
The 2016 deal landscape
The research results suggest that in terms of deal volume, 2016 is projected to be even stronger than 2015. Of respondents, 91% say that they will initiate at least one M&A deal in 2016, up from 82% in 2015. The data further shows that respondents also expect to initiate more deals in 2016, with one to three deals dropping from 48% last year to 38% this year, while four to six increasing from 17% last year to 34% next year. The seven to nine category too is expected to see an increase, from 4% to 10%, while the more than ten category will see a slight drop this year – from 12% to 9%.
The deals are for the most part on the lower end of the spectrum, with 52% of initiated deals projected to be valued at less than $250 million, while 16% are between $250 million and $499 million. The number of mega deals, those above $5 billion, are relatively uncommon at 2% of respondents indicating such a possibility.
In terms of the industries that will see the highest number of deals in 2016 (based on respondents selecting up to six in the survey), 70% of respondents said technology will be the most active, followed by pharmaceuticals/biotechnology at 60%. Healthcare providers came in third at 47%, while media/telecom came in fourth with 42% of respondents indicating it as likely to see activity. The energy sector, touted to see significant activity this year, saw 21% of respondents indicate it as one of their picks. Financial services was not often picked by respondents as an area to see much activity over the coming year.
The executives surveyed further forecast that the appetite for M&A follows from a range of factors. One major factor (cited by 51%) that continues to affect the market is the considerable cash reserves which a large number of corporates are sitting on, with total reserves up 5.5% on last year at $1.5 trillion. Low interest rates (cited by 36%) means that companies can access financing at relatively low interest rates, further incentivising buying. 69% of respondents do note however that current market valuations are not sustainable.
In terms of the specific acquisitions and the benefits derived to the company, ‘entering into new lines of business’ and ‘expanding customer base’ both garner the top choice for 37% of respondents. This is followed by 'expanding geographic reach' with 36% of respondents. The objective of 'enhancing intellectual property or acquiring new technologies' garners 34% of respondents, while 'opportunistic reasons' are cited by 25% of the surveyed managers.
“Our survey paints a bullish outlook for M&A. In the absence of sharply destabilising factors, the economic fundamentals suggest that M&A activity may strengthen even further in 2016,” says Dan Tiemann, U.S. Group Leader of Deal Advisory and Strategy at KPMG.
Getting the most out of it
Acquiring a company is only one part of the wider process of bringing that company into the fold and reaping synergistic or expansionist benefits. According to 39% the most important factor in deal success is a well-executed integration plan. This is followed by correct valuation/deal price at 31% of respondents, and effective due diligence, at 18% of respondents. Positive economic conditions are of relatively little (11%) concern for respondents.
“Although due diligence may not be seen as the most important factor in deal success, it is obviously an essential part of deal execution. Without it, acquirers may be ill-prepared for what they have in store when they try to integrate their target. Effective due diligence helps to reveal risks and allows the acquirer to understand and tackle those issues pre-close,” according to KPMG’s Tiemann.