The Deloitte M&A Index 2016: Opportunities amidst divergenceQ4 2015

Record breaking deal values in 2015

We are expecting 2015 to end with over $4 trillion worth of deals making it the highest for deal values since 2007. However, on a last-twelve-months basis, there was a slowdown in the volume of transactions in the second half of 2015.

Figure 1. The Deloitte M&A Index

Deloitte M&A Index (projections) M&A deal volume (actuals)

Q4 2015 M&Adeal forecast

Q4 2015 M&Adeal forecast

8,500

9,000

9,500

10,000

10,500

11,000

11,500

12,000

Q42015

Q32015

Q22015

Q12015

Q42014

Q32014

Q22014

Q12014

Q42013

Q32013

Q22013

Q12013

Q42012

Q32012

Q22012

Q12012

Q42011

Q32011

Q22011

Q12011

Q42010

Q32010

35,000

40,000

45,000

Q42015

Q32015

Q22015

Q12015

Q42014

Q32014

Q22014

Q12014

Q42013

Q32013

Q22013

Q12013

Q42012

Q32012

Q22012

Q12012

Q42011

Q32011

Q22011

Q1 2011

Q42010

Q32010

Global M&A deal volumes

Source: Deloitte analysis based on data from Thomson One Banker

Last twelve months deal volumes

High: 11,600

Low: 11,000Mid: 11,300

Factors influencing dealmaking Divergence in economic growth

After a strong recovery, the US economy experienced a modest slowdown in the second half of 2015 and the IMF cut the US growth outlook slightly. The IMF also expects modest growth in the eurozone, China has missed its growth target, whilst Brazil and Russia have slipped into recession.

In contract, India will be the fastest growing major economy in 2015, and four of the ten fastest growing economies in 2015 are in the ASEAN region.

Such divergence in economic growth means companies need to be actively on the lookout for growth markets and deal opportunities.

-6

-4

-2

0

2

4

6

8

10

12

IndiaChinaUKUSEurozone

2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Figure 2. IMF real GDP growth, actual and forecast (2008-17E)

Source: Deloitte analysis based on data from Bloomberg

GDP growth %

Monetary policies among the major central banks are diverging. In the US, the market is widely expected to have already priced in the gradual increases to the Federal Reserve interest rate. While we do not expect any shocks in the debt market, increase in the cost of credit could lead to a slowdown in the issuance of acquisition-related bonds which globally stands at $282 billion, a 15-year high.

At the same time, the ECB is committed to its quantitative easing programme, which has led to a slide in bond yields.

This presents opportunities for global companies to take advantage of the funding conditions in Europe to raise additional debt.

Factors influencing dealmaking Divergence in monetary policies

Source: Deloitte analysis based on data from Bloomberg

-150

-100

-50

0

50

100

150

200

250

Figure 3. US vs Germany ten-year government bond yields, 2006-15 YTD

Spread US-Germany (RHS)

Bas

is p

oint

s

US Generic Govt 10 Year Yield (LHS) Germany Generic Govt 10 Year Yield (LHS)

0%

1%

2%

3%

4%

5%

6%

2015201420132012201120102009200820072006

Factors influencing dealmaking Divergence in corporate performance

S&P 500STOXX® Europe 600

Figure 4. STOXX® Europe 600 Index and S&P 500 Index constituents average net profit margin (%), 2000-14

Source: Deloitte analysis based on data from Bloomberg

0%

2%

4%

6%

8%

10%

12%

141312111009080706050403020100

Since the financial crisis, European corporate earnings have trailed those of the US companies, where they are close to 15 year highs. However, the gap is expected to narrow if European demand picks up following the ECB stimulus. We have already seen European corporate margins increase at a strong pace since 2013, while S&P 500 companies are expected to show three consecutive quarters of declining earnings.

We expect US companies to continue cross-border M&A to offset some of the pressure, and benefit from growth in new markets.

Factors influencing dealmaking Divergence in deal valuations and cash positions

P/E multiples for deals in the US and Asia are well above their 15 year average, whereas in Europe they are still close to their average.

European companies have access to local markets that are expected to grow faster than many other developed economies, making them attractive acquisition targets at favourable deal P/E multiples.

With $1.6 trillion, North American non-financial companies, led by those in the US, have the highest levels of cash reserves in the S&P 1200 Index and this puts them in a strong position to acquire assets in Europe.

Note: 2015 YTD refers to 16 November 2015

Figure 5. P/E deal multiples for US, Europe and Asia-Pacific as a target, 2000-15 YTD

US Europe Asia-Pacific Average

Europe:22.2 on average

US:24.5 on average

Asia Pacific:21.7 on average

Source: Deloitte analysis based on data from Thomson One Banker

15x

17x

19x

21x

23x

25x

27x

29x

31x

33x

2015YTD

201420132012201120102009200820072006200520042003200220012000

Figure 6. Cash reserves of the non-financial constituents of the S&P Global 1200 ($bn), 2008-14

Source: Deloitte analysis based on data from Bloomberg

Asia-Pacific Europe North America

0

500

1,000

1,500

2,000

2014201320122011201020092008

Factors influencing dealmaking Impact of Chinese slowdown on M&A markets

Total disclosed deal values ($bn) GDP growth %

Source: Deloitte analysis based on data from Thomson One Banker and EconomistIntelligence Unit

Figure 8. China’s disclosed M&A deal values ($bn) and GDP growth (%), 2000-Q3 2015 LTM

Figure 7. Outbound Chinese M&A deal values into Europe and North America

Outbound deal values Inbound deal values

0100200300400500600700800

Q3

2015

LTM

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Domestic deal values China’s percentage change in real GDP (%)

0246810121416

$35.5bn

$2.7bn

$8bn$10.7bn

Europe North America2015 YTD 20092009 2015 YTD

The decline in Chinese GDP growth and the shift to a consumption-driven economy is mirrored by a steep increase in M&A activities, both domestic as well as cross-border. So far this year, Chinese companies have spent $65.8 billion in overseas acquisitions, with the majority in Europe. However, there was a decline in the volume of outbound acquisitions made in the E&R and manufacturing sectors, while there was an increase on the part of TMT and consumer business companies.

The slowdown in Chinese growth is expected to have a ripple effect on M&A markets, first in the commodities sector, where consolidation is expected, as well as in commodity exporting nations where activities could slow down. It could also lead to consolidation in sectors such as shipping and logistics which depend on growth in trade.

Factors influencing dealmaking Strong resurgence in Japanese dealmaking

Driven by the weak yen, Japanese corporate profits are at their highest levels in over ten years. At the same time, Japan remains saddled with falling domestic consumption compounded by a decline in real earnings, an aging population and a shrinking GDP.

In response to these pressures, Japanese companies are actively looking abroad for growth prospects.

Figure 9. Japan’s disclosed M&A deal values ($bn)

Source: Deloitte analysis based on data from Thomson One Banker

Outbound Domestic

$56.4bn

$81.4bn

$10.7bn

$46bn

2015 YTD 20092009 2015 YTD

Factors influencing dealmaking Focus on integration

Since the beginning of 2014, companies have announced around $4.9 trillion worth of deals globally.1 We estimate that annualised cost synergies represent, on average, 3-4% of the transaction value. This means that companies have committed to realise between $150-200bn worth of annualised synergies.

If all the announced cost synergies are realised and sustained, this could add an estimated $1.5-1.9 trillion to the value of these companies.

The stakes are therefore high and ensuring successful deal integration is likely to be near the top of boardroom agendas for many months to come.

Figure 10. Expected annual synergies as a percentage of disclosed deal value (%)

Source: Deloitte analysis

Energy & Resources

Professional Services

Life Sciences & Healthcare

Consumer Business

Telecoms, Media & Technology

Financial Services

Real Estate

4.2%

3.7%

3.5%

3.3%

3.29%Averageannouncedsynergies ofdeal value

2.9%

2.9%

1.9%

1.4%

Manufacturing

$4.9trn

Acquisitionpremium

discloseddeal value

upside

integration costs

Targetvalue

before M&A

Targetvalue

before M&A

$200-$250bn

$1.5-$1.9trn value created due to synergies

Figure 10. Expected annual synergies as a percentage of disclosed deal value (%)

Source: Deloitte analysis

Energy & Resources

Professional Services

Life Sciences & Healthcare

Consumer Business

Telecoms, Media & Technology

Financial Services

Real Estate

4.2%

3.7%

3.5%

3.3%

3.29%Averageannouncedsynergies ofdeal value

2.9%

2.9%

1.9%

1.4%

Manufacturing

$4.9trn

Acquisitionpremium

discloseddeal value

upside

integration costs

Targetvalue

before M&A

Targetvalue

before M&A

$200-$250bn

$1.5-$1.9trn value created due to synergies

Figure 10. Expected annual synergies as a percentage of disclosed deal value (%)

Source: Deloitte analysis

Energy & Resources

Professional Services

Life Sciences & Healthcare

Consumer Business

Telecoms, Media & Technology

Financial Services

Real Estate

4.2%

3.7%

3.5%

3.3%

3.29%Averageannouncedsynergies ofdeal value

2.9%

2.9%

1.9%

1.4%

Manufacturing

$4.9trn

Acquisitionpremium

discloseddeal value

upside

integration costs

Targetvalue

before M&A

Targetvalue

before M&A

$200-$250bn

$1.5-$1.9trn value created due to synergies

1. Private Equity involved deals excluded

Factors influencing dealmaking Cross border M&A

Cross-border M&A has been one of the key features of 2015 – so far this year $1.07 trillion in cross-border deals have been announced. Europe has been at the centre of cross-border deals, with European companies participating in 53% of all announced deals. The North America-Europe corridor has dominated, worth $311 billion.

So far this year, the growth markets nations have announced $49.6 billion of acquisitions in G7 nations, whereas the G7 nations have announced only $30.7 billion in M&A deals in growth markets, the lowest in over a decade.

Cross-border deal flow is expected to be a key theme in the coming years, as major economies strike agreements and alliances to bolster trade.

Figure 11. Cross-border deal values by target region ($bn), 2015 YTD

Note: 2015 YTD refers to 16 November 2015. APAC refers to Asia-Pacific; MEA refers to Africa/Middle East

Source: Deloitte analysis based on data from Thomson One Banker

Europe to UK$207.9bn

UK to US$33.8bn

US to APAC$22.5bn

US to Europe$114.1bn

Japan toNorth America

$26.4bnChina toEurope

$35.5bn

Inbound to EuropeNorth America: $150.9bnAPAC: $68.1bn

Inbound to North AmericaEurope: $160.5bnMEA: $48.7bnAPAC: $56.9bn

Inbound to Asia-PacificNorth America: $31.4bnEurope: $9.1bnMEA: $10.5bn

2. The G7 comprises of Canada, France ,Italy, Germany, Japan, UK and US. The growth markets are defined as Brazil, China (incl. Hong Kong), Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey, Saudi Arabia, United Arab Emirates.

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Deloitte LLP is the United Kingdom member firm of DTTL.

This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

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ContactsIain MacmillanManaging Partner, Global M&A Services 020 7007 2975imacmillan@deloitte.co.uk Sriram PrakashGlobal Lead M&A Insight020 7303 3155sprakash@deloitte.co.uk

About The Deloitte M&A IndexThe Deloitte M&A Index is a forward-looking indicator that forecasts future global M&A deal volumes and identifies the factors influencing conditions for dealmaking.

The Deloitte M&A Index is created from a composite of weighted market indicators from four major data sets: macroeconomic and key market indicators, funding and liquidity conditions, company fundamentals, valuations.

Each quarter, these variables are tested for their statistical significance and relative relationships to M&A volumes. As a result, we have a dynamic and evolving model which allows Deloitte to identify the factors impacting dealmaking and enable us to project future M&A deal volumes. The Deloitte M&A Index has an accuracy rate of over 90% dating back to Q1 2008.

In this publication, references to Deloitte are references to Deloitte LLP, the UK member firm of DTTL.