With capital ready to be deployed, along with the increasing availability of financing, PwC expects companies and financial sponsors to use M&A to enhance their growth prospects in the new year. Corporate cash levels remain steady at $1.1 trillion for the S&P 500, indicating continued opportunity for companies to put their capital to work through M&A. In the eleven months ending November 2012, there were a total of 7,585 transactions representing $705 billion in disclosed deal value. In October alone, deal value spiked to a 14 month high, reaching $96 billion and with 754 deals, October was the most active month since August 2011. In terms of deal size - and with the absence of "transformative" mega deals - middle market deals have been the "silver lining" for deal activity, accounting for 98 percent through November in 2012. PwC expects this trend in middle market deals to continue in 2013.
"Both corporate and private equity players are thinking about transactions to expand market share, build brands and fuel their long term strategic plans. In today's environment, companies must be agile to act with discipline, speed, and unbiased thoroughness to execute when a good potential acquisition comes to market," said John Potter, Deals partner at PwC. "A recent poll during our M&A integration webcast found that 89 percent of executives expect to see similar or increased M&A activity over the next year, with 45 percent expected to plan a deal within the next six months. Deal making, whether by acquisition or divestiture, is very much at the top of the agenda for those pursuing new growth opportunities in 2013."
In light of available cash and growth strategies, a desire to get deals done has heightened the competition among corporate and private equity buyers. According to PwC, more bidders are taking a longer look at a given target over the past 12 months.
Divestitures accounted for 43 percent of total disclosed deal value and 30 percent of deals overall, the highest level since 2005, and should remain a key driver for deal making in the year ahead as companies seek to unlock value in assets. Those that are currently looking to divest assets have stepped up the sell side diligence process to showcase potential value for quality assets for potential buyers.
"Successful divestitures in today's marketplace require a sharp focus and rationale around the opportunities that an asset has to grow. An accurate portrayal of long-term deal value for an asset helps ensure that a buyer and a seller can meet at a reasonable price and unlock value and opportunity for the future of both companies involved in the deal," according to Ron Chopoorian, PwC's U.S. Divestitures Leader. "With preparedness and rigor around the sell side process serving as essential components for successful divestitures, we are seeing auctions become broader and participants 'staying in play' for longer periods of time."
With a total of 1,334 transactions and $128 billion in value, private equity deals accounted for 18 percent of total deal value, indicating that while corporates continue to drive overall activity, private equity's involvement in the marketplace remains very active. With roughly $1trillion in dry powder waiting to be deployed, sophisticated private equity buyers are scenario planning for every deal outcome to generate the best returns for their investments.
According to PwC, private equity continues to prepare for multiple exit options, including refinancing debt, recapitalizations, IPOs and sales to strategic buyers to take advantage of shifting windows of opportunity. On the buy side, private equity remains a very active deal participant, especially in the middle market and with divested corporate assets. The increased availability of high yield debt is a main driver fueling private equity activity in the U.S. marketplace.
With creditors' thirst for higher yields, financing for transactions remains attractive for financial sponsors to pursue new deals and monetize existing investments. While the market remains extremely competitive for high yield offerings, businesses raising capital should be thoroughly prepared and have the infrastructure in place to address the needs of their public investors. According to PwC, proper preparation for debt financing transactions enables a business to communicate a compelling story and address creditor inquiries in a timely fashion. This debt preparedness helps add increased certainty to a deal for sellers, and guide buyers through an accelerated time table to complete a transaction.
Notable sectors that continue to present opportunities include:
Oil & Gas - Both volume and value levels are close to 2011 levels with an increase in mega deals led by private equity funds that have increased their investment and exposure to the energy industry. PwC expects deal activity to increase in 2013, with ongoing consolidation in the shale plays very likely. Large international oil companies are expected to continue to increase their positions in the unconventional plays in North America. Private equity will likely continue to invest heavily in the energy space - both upstream and midstream. Foreign buyers may increase activity in 2013 looking to corporate transactions to help them increase inventory of projects as well as the size and quality of their management teams. According to PwC, the likelihood of more energy related mega deals in 2013 is certainly higher.
Financial Services - Deal activity remains steady compared to 2011 in terms of announced deals. Despite receding asset quality and valuation concerns across the industry, the prolonged period of implementation of new regulatory standards has created additional impediments to deals. Going forward, both domestic and global financial institutions continue to seek divestiture of non-strategic operations in seeking to further bolster capital levels and unlock asset value. At the same time, as organic loan growth has slowed, many banks will look to acquire asset-generating businesses. PwC expects valuation gaps will narrow which, coupled with resolution of regulatory uncertainty, will likely drive increased deal volume in the coming year. While there has been limited private equity activity within the insurance and banking sectors, there has been an increase in private equity deal activity within the asset management sector, a trend PwC expects to continue in 2013.
Healthcare & Pharmaceuticals - Throughout 2012, health industries M&A activity was hindered by the uncertainty of the presidential election. Now with a near-certain implementation of the Affordable Care Act (ACA) and its sweeping reforms impacting business models, PwC expects 2013 to be a banner year for M&A activity across health industries. For healthcare providers, this momentum will be buoyed by economic pressure to accept lower reimbursement rates and as this pressure mounts, margin compression on single-site or inefficient operators will force divestiture or partnering strategies. Consistent with the last few years, continued acceleration of deals involving financially struggling providers seeking lifelines from larger, healthier systems is likely to continue. In addition to provider-to-provider deals, 2013 may see the trend of providers partnering or merging with payers continue. For payers, no deals are more prevalent than the large health insurers positioning for the impact of the insurance exchanges and increased Medicare and Medicaid enrollments. And while high-profile, high-value deals of this nature may be less frequent in 2013, PwC expects health insurers to continue seeking enrolment expansion through M&A during 2013. In the pharmaceutical industry, large companies continue to reshuffle their businesses portfolios and seek new avenues for growth in emerging markets. Key players in pharma continue to experiment with new business models involving non-pharma categories, joint ventures or divestitures as a means to unlock shareholder value. Consolidation remains active among specialty pharma and personalized medicine companies, while medical device companies explore the need to gain scale in the U.S. and abroad.
Technology - While technology deal volume trended lower in 2012, deal value exceeded 2011 through the third quarter - momentum which began in the final three months of 2011 with large mega deals contributing to a record quarter for deal value. Despite higher overall values through September 2012, PwC expects a slight reduction in full year acquisition value among technology companies due in part to the global macroeconomic environment. However, PwC sees a silver lining in very early signs of growing activity among large technology companies to re-evaluate their product and business portfolios and initiate divestitures. According to PwC, there are multiple drivers for future M&A activity in the sector including changes in enterprise customers' demand towards cloud technology services, continuing high growth in social and mobile sectors and a favorable appetite among technology oriented private equity funds for slower growing but cash flow producing assets.