US M&A market expected to heat up in 2014
January 2014 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Deal making in the early months of 2013 appeared to bode well for the remainder of the year; indeed, the first quarter saw a liberal sprinkling of blockbuster announced M&A transactions. Berkshire Hathaway acquired the HJ Heinz Company for around $28bn, American Airlines and US Airways confirmed their plans to merge in an $11bn deal, and Dell Inc announced its intention to be taken private in a $24bn takeover by company founder Michael Dell. However, despite the encouraging nature of these deals and the optimism those transactions generated, deal activity last year was relatively flat. By September, deal value had topped the $1.5 trillion seen in the first nine months of 2012, but this was wholly dependent on the bumper deal agreed by Verizon and Vodaphone, without which deal value would have been down by 4 percent.
A number of factors played a role in keeping deal activity subdued. Arguably, one of the most important causes of lacklustre activity was the continuing uncertainty surrounding the modest recoveries of the world’s major economies. There was also the ever present spectre of rising interest rates. Furthermore, a great deal of bellicose rhetoric from activist investors, all of whom were clamouring for a return of capital to shareholders, contributed to the low key M&A market.
However, despite the relative disappointment of 2013, according to an annual survey carried out by law firm Dykema, many optimistic corporate executives expect the caution of last year to be replaced with more consistent deal making activity throughout 2014. Dykema’s 2013 Mergers & Acquisitions Outlook Survey is the firm’s ninth annual survey of executives and outside advisers within the M&A sector. The firm surveys chief executives, chief financial officers and other professionals to gauge their insights and perspectives on the prospects for the M&A market in the coming year.
Over 68 percent of the 110 respondents surveyed believe that the M&A market over the coming 12 months will be stronger than in the previous year. Furthermore, 50 percent of respondents hold a positive outlook about the US economy in 2014, the most since 2005. Forty-one percent of respondents were neutral on the economic outlook for the US over the next 12 months. Just 8 percent of those surveyed held a negative outlook. These figures are a stark change from 2012’s survey results. In 2012, 37 percent of respondents felt that the market would be stronger in 2013 and just 25 percent felt positive about the state of the economy in the year ahead. “As the nation continues to recover and rebound financially, the business community appears to be more optimistic about their investment options and the US economy this year,” said Dave Cellitti, leader of Dykema’s M&A practice. “Excess capital would seem to be one main reason for this surge in optimism; however, executives are still cautious as they continue to make decisions in a turbulent economic environment.”
The business community is more confident that 2014 will see acquisitions, says Jeff Dalebroux, director of Dykema’s business services department. “This increased confidence is undoubtedly connected with lower rates, availability of capital, and an overall positive outlook for the economy moving forward,” he notes. This new attitude is reflected in the survey, in which 70 percent of respondents anticipated that they would be involved in an acquisition in the coming year. In 2012, only 53 percent of those surveyed responded positively to the same question. Furthermore, for the sixth consecutive year, the majority of the survey’s respondents – 57 percent in the case of the 2013 survey – said they expect strategic US buyers to increase their presence in the market.
Although, on the whole, M&A in 2013 was rather deflated, deal volume in the US did actually increase by 10.5 percent between the second and third quarters of 2013. This trend is expected to continue through 2014 due to ongoing buyer demand.
There can be little doubt that 2013 saw the economic outlook – both globally and within the US – improve, however there were still a number of significant roadblocks hindering deal making throughout the year. When identifying the most common obstacles encountered, uncertainty in the economy topped the list. Availability of a quality target was the second most common obstacle, while valuation of available companies ranked third in the list.
Uncertain US economic conditions were cited by most respondents as an explanation for low-key M&A activity in the country over the past 12 months. The looming threat of a number of economic challenges and the manner in which those challenges were met had a dramatic impact on the confidence of M&A market players. The impact of the coming sequester, the embarrassing government shutdown during October, and the overarching spectre of the debt ceiling all played their part in eroding confidence.
In the survey, 70 percent of respondents anticipated that they would be involved in an acquisition in the coming year as opposed to just 53 percent in 2012. For the sixth year in a row, most respondents also expect strategic US buyers to increase their presence in the market during 2014.
Financing, the second most common obstacle to deal making cited in the 2012 survey, fell to fourth place last year, indicating that the availability of accessible credit for small and medium sized businesses has increased over the last 12 months. The net amount of small business loans backed by the US Small Business Administration has increased by nearly $1bn year on year, as the agency backed 12,976 loans totalling $5.3bn during Q3 2013 alone. This is a healthy step up from the 11,442 loans totalling $4.3bn which were backed by the administration during the same period in 2012.
Yet even amid this optimism, the survey still found some lingering effects of the global recession and economic downturn. Respondents noted that, in their opinion, uncertainty around the US economy was the single biggest obstacle to deals in the last 12 months. Forty-three percent of those surveyed felt the US economy had stood in the way of deal completion.
After years of stagnation and inaction, optimism in the US M&A market is beginning to grow. One of the key drivers for this optimism is the sheer amount of money sitting idly on the balance sheets of many corporations. “There’s a lot of capital that’s parked on the sidelines,” noted one survey respondent. “If the economy is neutral to positive, we anticipate that there will be investments, before interest rates creep up.” The modest recovery within the economy is likely to increase pressure on companies to utilise their long-term capital. Improving credit markets and historically low interest rates may also serve to help encourage firms to engage in M&A activity, particularly firms which, until recently, have been willing to sit on the sidelines. Furthermore, once certain players begin to become active in the M&A market, that activity is likely to act as the catalyst forcing competitors to also act.
Fifty-four percent of all those surveyed felt that the US economy will improve over the coming year, whereas 38 percent of respondents felt that there would be no significant change. In the 2012 survey, just 30 percent of those surveyed felt that the economy would improve in the next 12 months compared to the prior year. Only 7 percent of respondents to the 2013 survey thought the economy would be worse in 2014. Notably, the manufacturing sector was offered a particularly bullish outlook for 2014. Optimism within US industrial manufacturers reached its highest level in the third quarter of 2013 since the first quarter of 2012.
Respondents to the survey noted that foreign investors will most likely decrease their presence in the US M&A market over the next 12 months. The fact that many foreign currencies are worth considerably more than the dollar could act as a deterrent. One respondent to the survey noted that foreign investors will be unlikely to invest in the region as they “have already saturated the US market and see our overabundance of debt”. Instead, 57 percent of those surveyed noted for the sixth year running that the group most likely to increase its US presence in 2014 would be strategic US buyers. In 2012, 46 percent of respondents tipped US strategic buyers to increase their presence.
Strategic US buyers held the most influence over deal valuations throughout the last 12 months, according to respondents. Forty-eight percent of all those surveyed stated that the group held the most sway over valuations, an increase of 8 percent compared with 2012’s survey.
Seventy percent of all respondents also stated that they were confident their company, or portfolio company, would be involved in an acquisition in the coming 12 months. This figure is a substantial improvement on 53 percent from the 2012 edition of the survey. Sixty-five percent of respondents felt that their companies would not be involved in a sale during 2014 – in the 2012 survey that figure reached 80 percent.
Another reason for growing confidence in the coming 12 month period is the strengthening of equities markets. Clearly, an improving stock price can greatly increase a company’s standing with investors, allowing public companies more leeway to make a takeover bid. As a cipher of this growing economic confidence, the S&P 500 gained 4.7 percent and the NASDAQ 10.8 percent in the third quarter of 2013.
The economic climate is beginning to foster optimism among M&A insiders. It is entirely possible that once M&A activity begins in earnest, it will begin to gather significant momentum. Some analysts felt that 2013 with its initial tranche of headline grabbing M&A deals would bring about a snowball effect; however, it would appear that a greater number of industry professionals feel that the coming 12 months will offer more opportunities for firms looking to make strategic additions.
For some firms, the burgeoning optimism surrounding the M&A market is informed by the large amount of cash currently sitting idle on corporate balance sheets. For a variety of reasons, in the coming year it would appear that many companies will be looking to put that money to work. Low interest rates may help to attract those companies that are not awash with cash but that also do not want to be left behind
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