Deloitte On Mergers And Acquisition Trends

M&A Trends: Expectations High As Conditions Shift

By: Brian Kunisch

The past year marked the busiest ever for mergers and acquisitions (M&A). During the frenetic 12 months, US companies announced more than $2.1 trillion in transactions.  Global M&A volume topped $4.7 trillion in aggregate.  To put that number in context, the worldwide total exceeded the gross domestic product (GDP) of all but two nations.  The $4.7 trillion tally was a significant increase over 2014’s $3.4 trillion and surpassed the previous annual record set in 2007.  Despite the slowdown in the first quarter of 2016, executives at US corporations and private equity firms predict that the pace of M&A activity will continue—or even ramp up—according to Deloitte’s third annual M&A Trends Report.

Of the nearly 2,300 survey respondents from US corporations and private equity firms, an overwhelming majority—87 percent—said they expect their deal activity to sustain or better 2015’s record pace. A number of factors are driving the optimism, creating an environment ripe for deal-making.  Interest rates are still at historically low levels and debt markets have slightly rebounded—enabling PE firms with access to capital to continue doing deals.

Boundaries are increasingly blurring between industry sectors as technology penetrates and reshapes traditional business models. For instance, banks are working to deepen their capabilities by acquiring financial technology firms, while automobile companies have turned their attention to connected vehicles.  The convergence of technology across industries is adding a new dimension to deal-making.

Among the key findings in Deloitte’s 2016 M&A Trends Report:

  • Deal activity is expected to remain strong with 52% of private equity respondents anticipating they will actively pursue a greater number of deals over the next year.
  • Bolt-on acquisition activity is expected to grow.  31% of PEI respondents believed their firm will make 11 or more add-on acquisitions over the next year – up from 22% in 2015 and 14% in 2014.
  • Debt markets for LBOs are expected to be tighter.  Only 24% of respondents believed the debt markets would be strong or very strong, while 41% felt tight or very tight. 21% also felt leverage multiples would decline.
  • Anticipated holding periods are decreasing. Planned PEI holding periods of five years or greater dipped from 31% in 2014 to 23% this year. Meanwhile, those reporting intended holding periods of 1 to 2 years rose from 21% to 27% in the same period.
  • The use of operating partners has continued to increase.  The three year increasing trend continued from 49% in 2014 to 63% in 2015 to 66% in 2016.

Against this optimism, respondents chose economic conditions as the top factor likely to determine deal success in 2016—the first time that’s been the case in the history of our survey. Global economic uncertainty was also seen as having the biggest influence on companies’ ability to pursue, finance and close deals in the next 12 months.

“It remains to be seen whether this year will be a tale of two halves, with improvement after a softer start,” said Russell Thomson, national managing partner, M&A Services, Deloitte “We are seeing significant interest and enthusiasm across corporations and PE firms, yet the challenges are very real and global uncertainty could lead to slower M&A activity as compared to last year’s record pace.” He went on to say that, “While we can’t control the economy, companies and PE firms can get the most out of their deals through focus, preparation, and execution. There’s no substitute for a well-thought-out M&A strategy and a solid execution plan to improve prospects for the completion of a successful M&A deal.”

A link to the complete M&A Trends Report can be found here.

Brian Kunisch is a partner in the Transaction Services group with Deloitte, where he leads the group’s East region private equity practice. For more information about Deloitte’s private equity practice, you can e-mail Brian at bkunisch@deloitte.com.

Deloitte is a Tier 1 AIC Associate Member.

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