PwC US Mid-Year M&A Outlook 2011*

US M&A value increases 39% driven by larger deals, according to PwC

Corporates dominate activity, private equity stays focused on middle market strategic business growth and globalization remain key drivers for M&A activity

NEW YORK - June 8, 2011 – In the first half of 2011, US merger & acquisition (M&A) activity continued the upward momentum of the deal market’s robust 2010 resurgence, according to PwC US.  With stronger capital markets, more available financing for M&A, and significant amounts of cash on corporate balance sheets and in private equity coffers, PwC expects US M&A activity to continue to pick up steadily through the balance of 2011.

“As expected, the favorable conditions that escalated through the end of 2010 and drove the pickup in M&A activity carried through in the first five months of 2011,” said Martyn Curragh, US Transaction Services Leader with PwC.  “An increase in total deal value in the last twelve months ending May 2011 indicates a sustained M&A cycle, and as confidence continues to build, markets stabilize and businesses look towards growth, we expect the acceleration of the M&A market to continue in the second half of 2011.”

In the first five months of 2011 there were 1,276 announced transactions with a total value of $454 billion, representing a 39 percent increase in value over the same period in 2010, which saw 1,336 deals worth $327 billion.  While announced deal volume declined 4 percent (in part due to a lag time in reporting deals), the competitive deal landscape and improved business confidence amongst buyers contributed to average deal size increasing 45 percent to $356 million from $245 million.

According to PwC, corporates continued to use their strong cash positions and stock prices as currency to make acquisitions.  Cash on corporate balance sheets continues to grow – the available cash on S&P 500 company balance sheets currently exceeds $1.1 trillion, according to Factset.  Through the first five months of 2011, corporates represented 82 percent of total deal volume with 1,046 transactions worth $384 billion, or 84 percent of total deal value.

“Corporate buyers emerged from the downturn as the dominant force in the deal market having stock piled cash from restructuring and cutting costs during a period when growth opportunities were limited,” added Curragh.  “At the same time, competition for quality assets is helping push up valuations and average deal value.  In this type of ‘sellers’ market,’ where assets are being strongly pursued, buyers are competing aggressively and are focused on identifying value drivers to optimize pricing.  With sellers taking more control, they are in the driver’s seat and are demanding a swift diligence process with more certainty around the outcome.  We have seen an increase in sellers’ preparation and diligence to enhance asset value, reduce business/management interruptions and decrease the overall diligence process time.”

Corporate buyers have been key players in larger deals as they look to execute on scalable transactions that directly contribute to their bottom lines.  There were 73 deals greater than $1 billion in value in the first five months of 2011, totaling $331 billion, or 73 percent of total deal value, compared to 60 deals totaling $225 billion in the first five months of 2010.  Of those large deals that occurred through May 31, 2011, corporates accounted for 85 percent in volume and 84 percent in value.

According to PwC, mega deals are increasing, but continue to represent a relatively small proportion of total deal mix under historic terms.  For mega deals (defined as deals greater than $10 billion), value increased 66 percent to $97 billion for the first five months of 2011 from $59 billion in the prior year while mega deal volume remained flat at four transactions.  (PwC notes that the 2011 value of $97 billion is heavily weighted by the $40 billion AT&T / T-Mobile and $26 billion Duke Energy / Progress Energy deal recently announced.)

Middle market (defined as deals under $1 billion) activity continues to attract significant deal flow, contributing 94 percent of deal volume and 27 percent of deal value with 1,066 middle market deals worth $126 billion in the first five months of 2011.

Corporates are also continuing to drive sell-side activity as they reevaluate their portfolios and exit those businesses in which they don’t have number 1 or 2 market positions.  In the last twelve months ending May 2011, carveouts comprised 29 percent of deal activity.

With a considerable amount of cash on the sidelines, private equity has also played an active role in the M&A market during the first five months of 2011 with financial investors capitalizing on favorable market fundamentals to realize their investments.  In the five month period ending May 31, 2011, there were 230 deals involving private equity as the acquirer, representing 18 percent of total volume.  Deal value involving a financial investor totaled $70 billion, or 16 percent of total deal value and a 50 percent increase over the first five months of 2010.

Due to a growing inventory of portfolio companies ready to be sold out of funds nearing the end of their fund life, private equity sales have increased significantly, representing $23.9 billion or 22 deals in the first five months of 2011, compared to $3 billion or 13 deals in the first five months of 2010.  Private equity backed offerings also continued to lead the IPO market recovery during the first five months of 2011, as expected, with a total of 29 offerings raising $10.2 billion.  According to PwC, there has been a noticeable trend of companies engaging in earlier IPO preparation to ensure speed of execution and certainty of outcome.

“Private equity players have been taking advantage of the window of opportunity to exit some of their holdings and are finding strong interest from strategic acquirers, the capital markets and secondary buyouts,” said Tim Hartnett, US Private Equity Leader with PwC’s Transaction Services practice.  “At the same time, they’ve been making platform acquisitions, which are typically larger than the smaller bolt-ons we’ve seen over the past three years.  While financial investors haven’t yet returned to mega deals, they’ve been very active on the sell side and continue to be more active on the buy side as middle market deal participants.”

“As confidence returns and banks’ appetite for lending around bigger deals begins to tick up, we expect deal size will continue to increase over the next 12 months.  With improved financing, there is a potential for larger and more quality assets to be had and the possibility that public-to-private deals come back in vogue, which could very well result in even larger deals taking center stage at the back end of the year,” continued PwC’s Curragh.

Dealmakers around the world are increasingly looking to deploy their capital and resources overseas to drive growth, and to take advantage of developing markets and growing populations around the world.  There were 349 outbound deals in the first five months of 2011, totaling $84 billion compared to 334 deals in the first five months of 2010, totaling $46 billion.

“The uptick in activity and value for outbound deals can be attributed to high growth expectations in emerging markets and fund managers’ raising more geographic and sector focused funds in response to limited partner and investor demand,” added PwC’s Curragh.  “We’re seeing companies get more aggressive in pursuing outbound transactions and there is a potential for these deals to get larger in value.  There are always special circumstances that need to be carefully considered when executing cross border deals because execution risk is significantly elevated for deals done outside of home markets impacting everything from valuations to integration.”

As a result, PwC leverages its strong deals practice in these local markets (e.g. Brazil and China) to assist its clients with these complexities.

“At PwC, we’re continuing to invest in specific business areas, people and industries where we see the strongest interest for transactions to support our clients’ deal strategies.  Industries that are attracting attention include pharmaceuticals, aerospace and defense, energy and power, and technology,” added PwC’s Curragh.

Sectors that continue to present opportunities include:

• High technology –While overall volumes have declined slightly, large transactions and higher valuations in the consumer and internet sectors resulted in 9 percent growth in total transaction value on an LTM basis.  While overall trends in transaction values will fluctuate from quarter to quarter based on the timing of large deals, PwC expects the underlying drivers of technology M&A of innovation, sector convergence and vendor consolidation, as well as the strong liquidity positions of larger players will continue to sustain volumes through the remainder of the year.
• Financials – Financial sector deal value rose 16 percent with 46 fewer deals when compared to the same period in 2010, further reinforcing a broader theme of increasing deal value.  According to PwC, M&A among financial services companies is poised to gain momentum through 2011, spurred by growing confidence in the economy, regulatory changes, investors with deep pockets, and pent-up demand for deals in the sector.  Recent and prospective regulatory changes will drive small- and medium-sized banks to seek scale through acquisitions, creating significant M&A opportunities in the latter half of 2011.
• Energy and Power – Energy and power deals made up the majority of total deal value with 20 percent, although represent only 9 percent of overall deal volume.  According to PwC, upstream deals will continue to dominate energy M&A activity levels, as independents shift their portfolios to oil dominated assets from natural gas assets.  PwC expects the midstream sector will also remain active as large MLPs and private equity look to add to their asset bases in response to the increase in demand for infrastructure and logistics resulting from new shale area development. Oil field services consolidation will also continue as the large players look to strengthen their core businesses to take advantage of increased drilling activity.  PwC also expects utilities and power sector consolidation to continue over the next several months as announced regulated utility deals complete the regulatory approval process and valuations remain low for selected generation assets.  As companies seek to gain greater scale and efficiency in their operations, these factors should continue to drive transactions as companies look to enhance share value and diversify geographically, and others look for opportunities to buy, versus build in certain areas.
• Healthcare – With a 40 percent increase in total deal value on an LTM basis, PwC expects healthcare M&A and joint venture activity will continue to accelerate, driven by the need to reduce costs, increase productivity and develop more integrated business models.  Managed care companies will continue to pursue growth opportunities abroad to diversify geographic risk.  The medical device industry will consolidate to achieve cost savings and diversify product portfolios, driven by the need to combat the impact of federal excise taxes, downward pressure on pricing and reimbursement and declining procedure volumes in certain high cost treatment areas.  Well financed hospital systems will continue to expand their footprint as struggling providers seek better capitalized merger partners.  Pharmaceutical companies will reshuffle portfolios and utilize acquisitions (in the US and abroad) to bulk up their pipeline of new products as they deal with significant amounts of patent expiration and use divestitures as another way to return value to shareholders.
• Media and Entertainment – Despite a seemingly slower recovery in the deal market in relation to other industries, traditional media businesses are enjoying the benefits of a rebounding advertising market driving up their valuations.  PwC expects M&A activity to follow as these businesses generate sustained cash flows from both advertising and subscription based models attracting potential suitors.  Additionally, content continues to be king as both private equity and corporate buyers look towards acquisitions in the TV production space to build out their library to address consumer demand for content anywhere on both mobile and tablet platforms.
• Industrial Products – Boosted by larger deals, industrial products deal value for all deals increased 35 percent despite a general decrease in the number of transactions compared to the same period in 2010.  The focus of buyers remains on revenue growth and horizontal integration to achieve cost efficiency and increase market share.  While energy and commodity input cost increases may limit some activity, PwC expects increased interest by private equity in the automotive and aerospace and defense industries, and divestitures in the chemicals sector to drive industrial products M&A activity.

*The accuracy of the PwC Transaction Services previous forecasts does not guarantee future accuracy.

The PwC Transaction Services practice provides financial due diligence on both the buy and sell side of a deal, along with advice on M&A strategy, valuation, accounting, financial reporting, and capital raising.  For companies in distressed situations, we advise on crisis avoidance, financial and operational restructuring and bankruptcy. With approximately 1,000 deal professionals in 16 cities in the US and over 6,000 deal professionals in over 90 countries, experienced teams are deployed with deep industry and local market knowledge, and technical experience tailored to each client's situation.  Our field-proven, globally consistent, controlled deal process helps clients minimize their risks, progress with the right deals, and capture value both at the deal table and after the deal closes.

For more information about M&A and related PwC services, please visit: www.pwc.com/ustransactionservices

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© 2011 PwC. All rights reserved. "PwC" and "PwC US" refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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