2015 was the year of the mega-transactions. Though these large, hundred-billion-dollar transactions have seemingly slowed in the first quarter of 2016, according to Deloitte’s “M&A Trends Report 2016,”factors like large amounts of balance sheet cash, valuation arbitrage, and interest rates indicate that deal activity will remain strong. Executives plan to focus on smaller transactions ($500 million and below), source foreign targets, and pursue divestitures in 2016.
FEI Daily interviewed Russell Thomson, national managing partner of Deloitte’s U.S. M&A Services practice to discuss the survey findings.
FEI Daily: Can you give some insight into how the survey was conducted and who participated?
Russell Thomson: The survey was conducted from the middle of February to the middle of March with 2,300 respondents. That cuts across a broad spectrum of M&A players. That’s public corporate and private corporates. There was also a meaningful representation of M&A executives at private equity funds. It really cuts across a very broad spectrum of M&A players. We see it as a great indicator of the sentiment out there in the broader market.
FEI Daily: What would you say are the most active industries in the market?
Russell Thomson: The most highly anticipated sector was technology. For the third year running, technology was highlighted as likely to be the most active sector. Clearly, that was a very active sector in 2015. Interestingly, it was number one for both corporates as well as the private equity spectrum.
Oil and gas was the second, which is one of those sectors that I think many of us have looked at and expected to pick up over the last twelve or so months. It hasn’t quite materialized. Coming through loud and clear in the survey was an expectation that oil and gas would pick up in 2016. I think our expectation is that it’ll probably get more active in the back half of 2016.
Then the third one highlighted as likely to be the most active was the healthcare sector on the corporate side, which clearly has been a very active sector here in the U.S. for last few years. Our expectation is that it will continue to remain active for the foreseeable future.
FEI Daily: Global economic uncertainty was seen as the top determinant of whether a deal can close. Does this differ from past studies?
Russell Thomson: It’s a slight uptick in the relative response for the concern about global economic uncertainty. If you look at historical correlations between M&A activity and economic performance, and the certainty around it, there has always been a strong correlation.
I believe the uncertainty around a number of different factors played a very significant role into the slow start to 2016. There was a tremendous amount of uncertainty, yes, around global economic performance, but also around the interest rate environment, oil and gas markets, and a number of other factors.
FEI Daily: What do you think accounts for the rise from a year ago in corporate divestitures?
Russell Thomson: 2015 was a very active year on the divestiture front. You saw a significant number of corporate divestitures and also some very large spin-offs.
The primary reason to pursue divestitures is to really focus around core assets and divest or spin off those deemed to be non-core. I think again that’ll continue to be a very significant driver and was what primarily came through in the survey. A number of other factors I think are also very relevant to the divestiture side. If you look at the IPO markets as an example, the IPO markets particularly in the US have largely been shut this year. The typical alternative exit strategies for different investments are not as freely available. That is another factor impacting the pickup in divestitures. 2015 was the year of the mega-transactions, these very, very large ($10 billion-plus) deals. We had more than fifty mega-transactions last year, which is more than double what we’ve had in any other peak cycle whether that’s 2000 or 2006. Typically, on the back of those large mega-transactions, for a number of reasons, including focusing on core versus non-core assets, but also for regulatory reasons you often see a pickup in divestitures.
FEI Daily: If a lot of companies are looking to divest, are there companies interested in buying those assets?
Russell Thomson: For every seller, there needs to be a buyer. I think the answer to that question has to be yes and for a multitude of reasons. Clearly, the economic uncertainty and the volatility in the markets in the first quarter of 2016 kept a number of buyers on the sidelines.
When you go back to the optimism that you referred to that comes through in the survey (where eighty-seven percent of those respondents said they expect 2016 to be either as active as 2015 or more so), I think that’s indicative of the fact that the sentiment there amongst buyers still remains very robust.
I believe it’s like that because a lot of the fundamentals that they look at and refer to, particularly in the U.S. market, remain very favorable to M&A, whether that’s significant cash balances on corporate balance sheets or the historically low interest rate environment. The financing markets have started to settle and improve over the last month or so. There are still, on the private equity side, record levels of dry powder on the sidelines. All of those factors are still very conducive to M&A activity.
The last point I would make is that M&A is really part of an overall corporate growth strategy. When you look at all the organic growth challenges that many companies are having around the world, the need to continue to supplement those organic growth challenges with inorganic growth means, whether that’s through M&A or joint ventures or alliances, remains very robust.
FEI Daily: Are the Treasury Department’s inversion rules affecting the M&A market?
Russell Thomson: When you look at what’s driving M&A, you have to look at it holistically. There are so many different factors that impact M&A. Tax efficiency and the tax plays around different transactions is clearly one of them. Yes, it will have an impact. A lot of the changes are very recent. You’ll have to see how that plays out over time.
FEI Daily: What’s the recommended course of action when a transaction isn’t generating the anticipated return?
Russell Thomson: That’s a tricky question. I think there are two things there. One is really looking at your M&A process. Did you have a clearly defined strategy? Do you have the right people? Do you have the right level of expertise? Are you leaning on the right advisors to support you through it? Do you have an appropriate level of experience?
What we’ve seen more and more over the last few years is not only an emphasis on the strategy part on the front end and getting the execution right, but also the integration. Did you realize the other intended benefits of that acquisition? Was there enough ownership and accountability by the various stakeholders in achieving that?
FEI Daily: How can companies ensure that they’re making the right decisions when it comes to their acquisitions?
Russell Thomson: There are no guarantees in life. Again, there were a number of questions around the survey that I thought were very interesting:
- A strong theme that came through was the importance of having a well-defined M&A strategy as part of an overall corporate growth strategy. Making sure that your M&A strategy aligns with the direction you’re trying to take the business.
- Ask “are you successful in achieving an intended return on investment or the strategic benefits of those transactions?” This really comes back to not only are you looking to buy and divest of assets that align with your overall corporate growth strategy, but again, in the survey, twenty-three percent of the corporate respondents said that the top reason for not achieving the expected value or the return on investments on different deals were gaps in their execution and integration. To me, I read that as there being no substitute for a well-planned deal.