the deloitte m&aindex...the deloitte m&a index is a forward‑looking indicator that...

M&AIndex Q2 2014

The Deloitte

Growth is back on the corporate agenda

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 has an accuracy rate of over 90 per cent dating back to Q1 2008.

>

Contacts

Iain MacmillanHead of UK M&A020 7007 [email protected]

Sriram PrakashHead of M&A Insight020 7303 [email protected]

Key points

• Deloitte forecasts a strong resurgence in deal volumes for Q2 2014, bolstered by strong economic figures from the US and Europe.

• We expect the global deal volumes to reach nearly 8,000 deals by the end of Q2 2014, up by 10% for the same period in 2013.

• More than $500 billion worth of deals were announced just in the first two months of 2014. It appears growth is firmly back on the corporate agenda.

• The S&P 1200 share price index currently stands close to its pre‑crisis high, however revenue growth has been declining since 2012. With confidence levels recovering, M&A activity provides a compelling way to enhance revenues and profits.

Figure 1. The Deloitte M&A Index

Global M&A deal volumes

Q2 2014 M&Adeal forecast

5,000

5,500

6,000

6,500

7,000

7,500

8,000

8,500

9,000

9,500

Q22014

Q12014

Q42013

Q32013

Q22013

Q12013

Q42012

Q32012

Q22012

Q12012

Q42011

Q32011

Q22011

Q12011

Q42010

Q32010

Q22010

Q12010

Quarter

Deloitte M&A Index (projection) Actual M&A deal volume (actuals)

7850

8200

2 | Deloitte M&A Index Q2 2014

Factors influencing M&A

The Deloitte M&A Index has highlighted a number of variables that impact M&A deal volumes:

Policy uncertainty fallsCorporate sector fundamentals are strong, however economic uncertainty over the last few years significantly dampened corporate risk appetite. In the previous editions of the Deloitte M&A Index we argued that until market sentiment improves, companies would not take on greater risk. On the policy front, there have been a number of positive developments such as the US deal on debt ceiling, decisive actions by EU leaders to manage the Euro crisis and the UK avoiding a double dip recession.

Policy uncertainty was one of the variables that strongly featured in our Q2 2014 projection calculations. There is an inverse relationship between macroeconomic policy uncertainty and M&A volumes. In recent months, policy uncertainty has been falling steadily and if this continues, we can expect an uptick in M&A volumes in the coming quarters.

IPO markets are boomingThe recent boom in the global IPO market is a strong indicator of increasing market confidence. In Q1 2014 IPO levels reached 40 per cent of total for 2013. If this trend continues, we can expect a record year for IPOs. While technology IPOs have grabbed the headlines, it is encouraging that in 2013 IPO listings were spread across a number of sectors, suggesting that growth prospects are well distributed across the economy.

According to Dealogic, 2013 was the most active year in recent record for Private Equity (PE) backed IPOs. There were 182 PE backed IPOs that raised a total of $56.4 billion. With successful exits underway, we expect Private Equity to start investing some of its record levels of ‘dry powder’, which Preqin estimates currently stands at $1.067 trillion.

Figure 2. Global policy uncertainty (Q1 2007-Q1 2014)

Index M&A Deals

0

2,000

4,000

6,000

8,000

10,000

12,000

2014

Q1

2013

Q4

2013

Q3

2013

Q2

2013

Q1

2012

Q4

2012

Q3

2012

Q2

2012

Q1

2011

Q4

2011

Q3

2011

Q2

2011

Q1

2010

Q4

2010

Q3

2010

Q2

2010

Q1

2009

Q4

2009

Q3

2009

Q2

2009

Q1

2008

Q4

2008

Q3

2008

Q2

2008

Q1

2007

Q4

2007

Q3

2007

Q2

2007

Q1

Source: Policyuncertainty.com, Thomson M&A, Deloitte analysis

*Weighted index is a weighted score for US, Europe and Chinese uncertainty index.

Weighted Index M&A Deals

Quarter

0

50

100

150

200

250

0

200

400

600

800

1,000

1,200

1,400

Figure 3. Global IPO volume and issuance (US$bn) (Q1 2009-Q1 2014)

Volume IPO issuance(US$bn)

0

20

40

60

80

100

120

140

160

180

Note: Q1 2014 data as at 18 March, 2014

Source: Thomson Reuters, Deloitte analysis

Sum of Proceeds Count of Issuer

2014

Q1

2013

Q4

2013

Q3

2013

Q2

2013

Q1

2012

Q4

2012

Q3

2012

Q2

2012

Q1

2011

Q4

2011

Q3

2011

Q2

2011

Q1

2010

Q4

2010

Q3

2010

Q2

2010

Q1

2009

Q4

2009

Q3

2009

Q2

2009

Q1

Quarter

Deloitte M&A Index Q2 2014 | 3

Factors influencing M&A

Pressure on revenue growthThe S&P 1200 share price index currently stands close to its pre‑crisis high; however revenue growth has been declining since 2012 at a rate of 3%. Companies will be under pressure to maintain their share price performance. At the same time, S&P 1200 non‑financial companies are sitting on record piles of cash and the net debt to EBITDA ratio for US and European companies is 18% and 8% below their 10‑year average respectively. With confidence levels recovering, M&A activity provides a compelling way to enhance revenues.

Changes to the political landscape could influence corporate risk and investment appetiteWith 21 general elections coming up in 2014, we expect changes to the political landscape may have an impact on corporate risk and investment appetite. Major elections include ones in the key emerging markets of India and Brazil, congressional elections in the US, parliamentary elections in EU and the Scottish referendum.

Figure 4. Corporate revenue growth rate vs. share price index (S&P 1200)

S&P 1200 index RevenueGrowth Rate (%)

Year

-15

-10

-5

0

5

10

15

20

Source: Bloomberg, Deloitte analysis

YoY Revenue Growth Rate (%) S&P 1200 index

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

General elections due in 2014.

Cases of social unrest and emerging crisis.

Global Crisis/Social Unrest• Ukrainian crisis• Social unrest in Turkey, Egypt, Libya, Syria, Argentina

Major Elections• Europe – Belgium, Hungary, Georgia, Romania, Slovakia, Sweden, Moldova, Lithuania, Turkey, EU Elections• Americas – US Congressional, Brazil, Columbia, Uruguay• Asia Pacific – India, Indonesia, Bangladesh, Fiji, New Zealand• Africa – South Africa, Libya

Figure 5. Global political scenario – 2014

Source: Deloitte analysis


Corporate barometer

We observed two significant changes in S&P 1200 company fundamentals. First there was a sharp decline in average revenue growth, which fell by 4.3% year‑on‑year in Q4 2013. This was partly due to the severe weather conditions in the US which resulted in unused inventories.

Second, average cash in hand fell from $6.2 billion to $5.3 billion. Some of the cash was spent on M&A. Global deals in Q4 2013 amounted to $521 billion.

Companies also increased their average capital expenditure from $455 million to $492 million, suggesting a more positive investment outlook and confidence in their balance sheet strength.

0 105.3

6.2

0 1.50.7

1.1

-5 5-4.3

2.0

0 250201

144

400 500492

455

500 700656

543

Figure 6. Company fundamentals (S&P Global 1200)(Q3 2013 vs. Q4 2013 average)

Average Cash in Hand (US$bn)

Average EPS

YoY Average revenue growth

Average dividend paid (US$m)

Average capital expenditure (US$m)

Average FCFF (US$m)

Q3 2013 average Q4 2013 average



Geographies

The US continues to lead the resurgenceIndustrial production in February 2014 grew at the fastest rate in six months – a positive sign business investment may take off in 2014.

US companies in S&P 1200 are sitting on reserves of $1.53 trillion, which is 51% of the total cash reserves of the index constituents.

US companies have started to become more active in global M&A markets. In Q1 2014, they were involved in 38% of all global M&A transactions up from 34% in Q4 2013.

An unexpected rebound in European dealsEuropean companies were involved in 35% of all global deals by disclosed values in Q1 2014, which is up from 27% during same period in 2013.

This trend is consistent with the 15% drop in cash reserves of the European companies from $970 billion to $822 billion.

Figure 7. Global cash holding pattern as per geographies**

US$ million

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2013

*

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Source: Bloomberg, Deloitte analysis**Includes S&P 1200 non-financial companies*2013 figures are for the companies which have reported as of date of publication.

Asia-Pacific Europe North America South America

Year

Figure 8. Region-wise M&A values Q1 2013 vs. Q1 2014

% of share of global deal values

0

10

20

30

40

50

60

MEASouth AmericaAsia-PacificEuropeUS

Source: Thomson Reuters, Deloitte analysis Note: This data set includes all deals where a company from a particular geography was involved either as a buyer or seller. Q1 2014 figures are based on figures disclosed as of date of publication.

Q1 2013 Q1 2014

5355

27

35

21 22

64

1 1


Sectors

Pharmaceuticals and Life SciencesPharmaceutical and Life Sciences companies are once again under pressure due to weak R&D pipelines. Indeed for some companies replenishing their pipelines is now a matter of survival. Historically they have responded through acquisitions and we expect this trend to continue with bolt‑on deals, rather than block‑busters. We also expect them to divest non‑core assets to free up cash for pipeline related acquisitions.

Figure 10. Average PE valuations as per sectors

2013 Average PE

ConsumerBusiness

E&R

Life Sciences

Manufacturing

ProfessionalServices

Real EstateTechnology

Media

Telecom17

15

19

21

23

25

27

15 17 19 21 23 25 27

Average PE – previous 10 years (2003-2012)

Source: Thomson M&A, Deloitte analysis*Bubble size denotes the deal volumes

Overvalued Undervalued

We expect M&A activities to be strong in the following sectors:

Technology, Media & Telecommunications (TMT) sectorTechnology, Media and Telecommunications companies are at the forefront of M&A activities. The ongoing revolution in media consumption habits is likely to fuel convergence inspired mergers. We expect both vertical and cross‑industry convergence deals. Successful mergers could create whole new market categories.

Figure 9. Deal values Q1 2013 vs. Q1 2014

US$ billion

0

50

100

150

200

Source: Mergermarket, Deloitte analysis*Deal values for Q1 2014 based on deals disclosed as of date of publication.

Q1 2013 Q1 2014

ConsumerBusiness

Energy, Mining& Utilities

Industrials& Chemicals

Pharmaceuticalsand Life Sciences

TMT

105.7

174.3

14.2

62.1

42.8

62.7

107.9

82.1

65.175.6


Charts we like

Figure 11. Growth prospects in major economies

60

80

100

120

140

160

180

200

Mar14

Feb14

Jan14

Dec13

Nov13

Oct13

Sep13

Aug13

Jul13

Jun13

May13

Apr13

Mar13

UK Euro Area US BRICS

*Consensus forecasts for 2014 GDP growth, March 2013 = 100Source: Economics & Markets, Deloitte Research

Figure 13. S&P 1200 buybacks vs. dividends (2000-2013)

US$ million

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Buybacks Dividends


2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Figure 15. S&P 1200 M&A spend as % of market capitalisation

%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

United States Europe


2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Figure 12. Cash position S&P 1200 sectors

US$ billion

0

500

1,000

1,500

2,000

2,500

3,000

TMT

Manufacturing

Energy & Resources

Consumer business

Life Sciences


201320122011201020092008

Figure 14. S&P 1200 short vs. long term debt

%

20

30

40

50

60

70

Long term debt as % of total debt Short term debt as % of total debt


2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

WideningGap

Figure 16. Average deal P/E multiples vs. average deal premium (%) (2001-2013)

Premium %

10

12

14

16

18

20

22

24

26

Average Valuation (P/E) (RHS) Average Deal Premium (LHS)

Source: Thomson Reuters, Deloitte analysis

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

0

5

10

15

20

25

30

PE (x)

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

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.

© 2014 Deloitte LLP. All rights reserved.

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198.

Designed and produced by The Creative Studio at Deloitte, London. 34082A

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 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

• S&P 1200 company fundamentals

• Valuations trends

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 per cent dating back to Q1 2008.

About the authorsSriram Prakash and Russell Shoult are from the Deloitte M&A Insight team, based in London, UK. Ravi Sekar, Haranath Sriyapureddy, and Abhimanyu Yadav are M&A analysts in the Business Research Center, at Deloitte (DTTL) in India.

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

the deloitte m&aindex...the deloitte m&a index is a forward‑looking indicator that...

Documents