Can M&A in US rebound in the second half of 2013?


By Ken Tysiac

Mergers and acquisitions slowed in the United States during the first half of 2013, but conditions are favourable for acceleration in deals in the second half of the year, according to a new analysis.

A total of 4,587 transactions were completed with $528 billion in disclosed deal value during the first half of 2013, according to a PwC analysis. That is a decrease from 5,643 deals and $556 billion in the second half of 2012, but more than the 3,870 deals and $350 billion in disclosed deal value in the first half of 2012.

The M&A figures captured in PwC’s M&A outlook are a compilation of data from Thomson Reuters with analysis by PwC. US deals are defined as all deals done by US acquirers including US outbound investments.

M&A activity in the United States particularly slumped in the second quarter this year, when 2,144 deals and $237 billion in disclosed deal value were reported, compared with 2,443 deals and $291 billion in the first quarter.

Global activity similarly saw a decrease in the first half of this year. After 20,473 deals and a disclosed value of $1.33 trillion were reported in the second half of 2012, the first half of 2013 saw 16,736 deals and $1.03 trillion in deal value.

PwC expects US M&A activity to accelerate in the second half of the year because fundamentals for transactions remain strong. Financing is readily available, and corporate cash levels and equity markets are strong, according to PwC.

The main obstacle in the M&A market is a shortage of quality assets for sale, according to John Potter, a PwC partner and M&A specialist.

But the resources and desire for deals remain. More than four in ten (42%) US CEOs said they plan to complete a domestic deal this year, according to PwC’s 2013 US CEO survey report. In the same survey, 30% of CEOs said they completed a domestic deal in 2012.

“We’ve got the interest in the executive office in growth,” Potter said. “We’ve got the focus on growth in excess of GDP and inflation. All those things say M&A is front and centre. The constraint that we see is the availability of assets and just the willingness to dedicate to multiple assets at one time. We’re seeing more selective focus from clients.”

Hottest sectors

Industry sectors that are ripe for deals in the US, according to PwC, include:

  • Technology: Although larger, integrated companies have built strong platforms of new IT offerings (social, mobile and cloud), significant opportunities exist to acquire more innovators to establish or maintain leadership positions, PwC’s analysis says.
  • Health: The US Patient Protection and Affordable Care Act’s implementation is expected to lead to partnerships that can improve efficiency and provide high-quality care. Consolidation in the health industry has increased more than 50% since 2009, according to PwC.
  • Financial services: A mixture of uncertainty and opportunities exists. Regulatory costs are increasing, valuation gaps remain, and differences between buyer and seller perception are hurdles. But the environment is conducive to asset sales, spinoffs and other transactions as major European institutions may look to divest non-core assets and US companies comply with increased regulation, PwC says.
  • Retail and consumer: The availability of private-equity funds and corporate interest in accelerating growth have the potential to drive deals, according to PwC.

Due diligence

Regardless of the sector, it’s important to proceed and research deals carefully in this environment, Potter said. A few years ago, he said, the assets available for sale were so attractive that it didn’t take a lot of work to determine whether a deal made sense.

The current situation makes acquisition decisions trickier. On one hand, the assets available are not so obviously valuable. On the other hand, if a company’s top choice for acquisition doesn’t work out, there might not be a suitable Plan B asset to target.

In the current environment, Potter said, it’s rare to find companies executing multiple deals.

“The vast majority of companies are doing single acquisitions,” Potter said, “and they’re focusing on the success of those acquisitions both in the alignment of the acquisition with their strategy, and then the execution of the acquisition to drive the value potential with the acquisition.”

Three recommendations

Potter offered three tips to companies that are prospective buyers in the current M&A market:

  1. Be focused. Concentrate on opportunities that are most closely aligned with your strategy. Focusing on too many alternatives can be a challenge.
  2. Be willing to dig deep. Be ready to put together a robust business case and plan for ownership earlier in the process than you might have in years past. The plan for ownership includes integration, strategic planning and what you plan to do with the business.
  3. Use your process to guard against bias. Consider many points of view and challenge the business case to address the bias inherent in the M&A process. Build credibility in the team and the plan. Understand what creates and drives bias, and have a process where you have governance and a thorough approach to help address bias by talking about it.

As part of the acquisitions process, Potter has seen many corporate teams engage in honest, reflective discussions evaluating the success of their past acquisitions. They are moving carefully to make sure they avoid making a mistake.

“The role of governance, the role of having a quality process is front and centre in people’s minds,” Potter said. “It is very easy to prove yourself right. I think a big focus in transactions is trying to prove yourself wrong. Can I put a hole in this hypothesis? Can I put a hole in this story? Am I challenging myself, is my organisation challenging itself, to really build confidence and credibility in our plan by looking for the things that disprove what we think the opportunity is?”

Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.

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