US M&A market flat in the first half of 2013
October 2013 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Despite the blockbuster deals announced in Q1 2013, the first half of the year saw relatively flat levels of US M&A activity, according to data published by Mergermarket and Merrill Datasite. Their annual half year report entitled ‘Deal Drivers America’ reviews M&A activity across the Americas and analyses emerging trends. According to the data, despite an encouraging first quarter, the first half of 2013 has provided very little real indication of where M&A dealmaking may be heading throughout the remainder of the year.
The first quarter of 2013 got the year off to a promising start. A potential M&A rebound was predicted in some quarters as a result of a number of multi-billion dollar deals being announced. On the strength of these transactions, deal values for the first quarter rose beyond those recorded during the same period in 2012.
However, the momentum generated by these mega deals did not trickle down into the mid-market, nor did it push on into the second quarter. On the whole, the first half of 2013 saw 32 deals announced or completed for companies valued at over $2bn. These deals spanned many different sectors including technology, media and telecommunications (TMT), healthcare, life sciences and energy. Yet in the middle market, although there were 79 deals announced valued between $251m and $500m, the number still represented a marked drop off compared to the same period over the previous three years.
Despite the slowdown in Q2, the top headline making deals in H1 came in at a total of $212.7bn. Accordingly, the value of the top 20 deals of H1 2013 surpassed the top 20 deals of H1 2012 by over $60bn. Although in many regions the M&A market remains poor, US M&A deal value rose by 10 percent year on year compared with 2012.
Indeed, the first half of the year saw the US lead the way for M&A as the nation’s economy rebounded from a turbulent and uncertain 2012. Amanda Levin, editor of the Americas for Mergermarket, notes in the report that “a number of clouds that hovered over the markets last year – the presidential election, the fiscal cliff, record high unemployment – have been removed, eliminating the uncertainty that hampered deal making last year”.
Furthermore, with the ending of the US housing crisis, which had so drastically curtailed bank lending, many banks have begun to lend commercially once again, according to the report. Corporate loans at record low interest rates have been made readily available to help finance acquisitions. We began to see the effects of this burgeoning economic recovery in the first half of the year, particularly in the first quarter. H1 M&A activity increased 12 percent in 2013, reaching a total of $336bn; in the same period of 2012, US M&A totalled $299bn.
The US is expected to be at the vanguard of any potential M&A rebound throughout the remainder of 2013, with a favourable outlook expected across all sectors.
The TMT sector led the way during the first quarter. Although the largest deal announced during H1 was the acquisition of HJ Heinz Company by Berkshire Hathaway and 3G Capital Partners for an enterprise value of around $28bn, the TMT sector dominated the first half of the year. The next three biggest deals in H1 were all related to TMT. Virgin Media Inc, Dell Inc, and NBC Universal Media LLC found themselves the targets of $25bn, $20bn and $16bn takeover bids, respectively.
If completed, the $20bn leveraged buyout of Dell announced in February by Silver Lake and company founder Michael Dell would represent the largest private equity transaction since July 2007. Although, at the time of writing, it is still unknown when the deal will finally be approved, the mere announcement of this mega-deal created a wave of optimism around a reinvigorated M&A market.
The TMT sector also saw 15 transactions for companies valued at over $1bn. The sector, which also had the highest deal volume in North America throughout H1, could be the most active sector throughout the remainder of the year, getting a kick-start from Softbank’s $21.6bn acquisition of Sprint. To date the deal has already presaged even greater consolidation in the sector.In July, Sprint completed its own $3.5bn acquisition of Clearwire, a move designed to prevent the company from being acquired by DISH Network. Similarly, in July AT&T bought Leap Wireless for S$4bn. The report notes that theindustry is closely observing the fallout from Softbank’s acquisition, with the expectation that more deals should follow.
Furthermore, television broadcast M&A is set to return in H2 2013. The report notes that TV broadcast buyers are likely to be on the offensive throughout the remainder of 2013 following two years of very little deal activity. Buoyed by the negotiation of retransmission fees and cash heavy balance sheets, TV M&A is likely to bounce back.
Throughout the relatively flat first half of 2013, the TMT sector was one of the rare sectors that actually outperformed H1 2012 in terms of total deal value. To underline the strength of the sector, the report highlights TMT’s performance in a ‘Heat Chart’ which serves as a gauge of potential deal flows in specific regions and sectors. The TMT sector tops the chart with 1078 ‘company for sale’ stories written about the industry during the first half of the year. Accordingly, activity in the TMT sector should remain strong in the second half of 2013.
Life sciences and healthcare
Historically low interest rates and decidedly modest organic growth within the majority of large healthcare companies had served to create ideal conditions for healthy M&A activity during the first half of 2013. However, this activity failed to materialise. Many companies within the life sciences and healthcare industry instead chose to exercise caution. As such, many boards and companies refused to pay over the odds, while also attempting to integrate large acquisitions previously made into existing businesses.
According to the report, there were just three healthcare deals completed during H1 valued at $5bn or higher. There was also only one deal valued between $2bn and $5bn. As such, the volume of deals completed in H1 2013 was down compared with the same period in 2012.
The report also suggests that an ever-increasing acceptance of globalisation will boost the confidence of boards within the life sciences industry, prompting them to sign off on more deals in the second half of the year. The largest deals completed during H1 were ThermoFisher Scientific’s $15bn acquisition of Life Technologies and Warner Chilcott’s sale to Actavis Pharmaceuticals for $8bn.
Deal volume within the healthcare services sector was also relatively subdued. The industry saw only two significant deals completed before the transformational Affordable Care Act comes into play in 2014. Hospital operator Tenet Healthcare Corporation acquired Vanguard Health Systems for $4.1bn, while Roper Industries purchased Managed Health Care Associates for just $1bn.
Another potential stumbling block to further acquisition of pharmaceutical companies in the first half of the year was the strong appreciation of listed mid-cap biopharmaceutical firms, specifically in the $1.5bn to $2.5bn range. Despite the attractive nature of a number of these mid-range firms, and their potential to supplement companies’ existing portfolios, many acquirers have baulked at supposedly inflated asking prices. Biopharma firms have been unwilling to offer in the region of $5bn for companies which, until very recently, would have been available for a fraction of the price, notes the report. Moreover, in light of the appreciation already witnessed, many sellers are cautious about the prospect of selling, lest they miss out on any potential share growth.
Despite the lacklustre start to 2013, bankers remain optimistic about M&A for the rest of the year, particularly as foreign acquirers have begun to target US manufacturers. As the European and UK economies have continued to suffer, many multinationals have begun to acquire firms in both North America and Asia.
Despite the $28bn Heinz deal and a handful of other big deals pushing the sector into third in terms of total deal value, with $56.9bn announced, the consumer sector suffered in the first half of the year. Analysts suggest that H2 will see a much improved performance from the consumer industry, as the first half of the year suffered a supposed lack of attractive and attainable targets, which negatively impacted M&A activity, particularly in the Americas.
The report also notes that private equity firms, and a number of private equity backed mid-market firms should also provide a much improved outlook for the second half of 2013. PE firms have already been actively acquiring companies in the fast growing fitness, health and wellness sector, and will continue to be active in the M&A market in the second half of the year, according to the report. PE firms are likely to continue to target similar companies. Sporting goods businesses are also expected to be attractive targets.
M&A activity in Canada is likely to experience a modest upswing in H2 following a difficult start to the year. Although the Canadian market did see some significant deals completed in the first half of 2013, deal volume was relatively low and these deals were taking place in industries which were particularly active.
However, the second half of year may see some improvement, suggests the report. The general strength of equity and debt markets, the abundance of dry powder, and the positive feeling in the marketplace should lead to increased deal volume going forward.
Cross-border M&A in a number of different sectors will also be buoyant. Although domestic M&A activity in Canada was down by 50 percent in H1, cross-border transactions now represent around two-thirds of all Canadian M&A activity.
Outlook for the future
Although the first half of 2013 saw a number of high value, headline grabbing deals completed, there was precious little overall activity. Accordingly, the US recorded relatively flat growth in its M&A activities during H1.
The lack of progress seen in the first half of the year has made it difficult to predict where M&A dealmaking might turn during the remainder of the year. However, the report suggests that, since US M&A deal value in H1 2013 increased by 10 percent over the previous year, dealmakers across all sectors should remain confident about the outlook for M&A through the second half of 2013.
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