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M&A Trends

Year-end report 2016


M&A Trends| Year-end report 2016 M&A Trends| Year-end report 2016

Executive summary 03
Deal characteristics 08
Industry convergence 12
Headwinds 14
Impediments to success 16
Looking abroad 18
Strategic drivers 20
Cash is king 21
Meet the team 22
About this report
This report is the result of a survey of 1,000 executives to About the survey 23
gauge their expectations for M&A activity in 2017 and to better
understand their experience with prior transactions.

All survey participants work in either private or public


companies or private equity firms with annual revenues of $10
million or greater. The participants consist of senior executives
(director-level or higher) involved in M&A activity. One-third of
corporate respondents work in the C-Suite, while half of private
equity respondents are involved in fund management.

 or more detailed information about this report see:


F
About this survey (page 23)

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M&A Trends| Year-end report 2016 M&A Trends| Year-end report 2016

Key findings
Executive summary
While 2015 was a record year
Deals on the rise in 2017
Seventy-five percent of for combinations, 2016 started
all respondents expect with a thud, and results lagged
deal activity to increase for the first three quarters
in 2017.
of the year. But in October,
US companies unleashed an
unprecedented wave of deals,
making it the busiest month
ever for domestic mergers
and acquisitions (M&A). Will
this momentum be sustained?

75%
According to the results of
our newest survey of 1,000

Whats in store corporate executives and


private equity investors, activity

for mergers
is poised to accelerate, perhaps
significantly, extending the
increase in deal-making seen

and acquisitions during the final months of


2016and potentially reversing

in 2017?
the slide of the early part of

64% the year.

The executives we surveyed


indicated several reasons
for optimism. For starters,
many report they have strong
strategic imperatives driving
their desire to do deals in 2017.
Meanwhile, stock prices remain
close to record-high levels,
Bigger deals in 2017
and interest rates, despite
Sixty-four percent
of corporate survey the forecast for an increase,
respondents expectdeal remain near or at historic lows,
size to increase in 2017.
and more companies say they
have increased cash levels and
intend to use their cash
to strike more deals.

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M&A Trends| Year-end report 2016 M&A Trends| Year-end report 2016

Key findings
Integration planning
Effective integration
planning remains the
number one factor to
ensure that deals work. The survey data provides Key findings include:
valuable perspective and
Seventy-five percent of all
a foundation for M&A
respondents expect deal
expectations as we enter
activity to increase.
2017. We will also continue to
monitor the US presidential Transactions may be bigger
transition and potential 64 percent of corporate survey
implications for the M&A respondents expect deal size

#1
baseline established by to increase.
the survey.
Divestitures may be a major
focus in 2017. Seventy-three
Optimism among percent of survey respondents
say they plan to shed businesses
executives is high. next year. (Up from 48 percent
More companies in our mid-year 2016 M&A
Trends Report.)
say they have
Effective integration planning
increased cash
25%
is considered the number
levels and intend one factor in ensuring that
deals work.
to use their cash to
Acquiring technology assets
strike more deals. has surged in importance as
a top strategic driver of M&A.

Industry convergence
is a major theme, with
consolidation rampant
Divestitures a
 re on the rise in related sectors. Many
Seventy-three percent of acquirers are looking to
respondents say they plan
technology companies to
to shed businesses next
year, compared to only position themselves for
48% of respondents in our the future.
mid-year 2016 report.

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M&A Trends| Year-end report 2016 M&A Trends| Year-end report 2016

Key findings
Technology acquisition
Acquisition of technology assets
surges in importance as a top
strategic driver of M&A, tying for
second with expanding customer
bases and slightly trailing product
These are only a few of the
or service diversification. important insights uncovered
in our latest survey. Inside, we
take a closer look at other deal
characteristics, the obstacles
that could suppress deal activity
in 2017, ongoing challenges in
realizing the anticipated value
of deals, and the outlook for deal
making in foreign markets.

As always, our goal is to provide


Consider this the insights you need to help
report to be a make sure your next transaction
is successful. Consider this
foundation for report to be a foundation for
your decision your decision making todayand
know that we are monitoring the
making today. impact of ongoing developments
such as the US presidential
transition and Brexit planning
as they unfold.

Russell Thomson
National managing partner
Mergers & Acquisitions Services
Industry convergence Deloitte & Touche LLP
Industry convergence remains a
major theme, with consolidation
rampant in related sectors and
acquirers looking to technology
companies, among others, to
position themselves for the future.

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M&A Trends| Year-end report 2016 M&A Trends| Year-end report 2016

Key findings Volume


Most expect deal
volume to increase.

Size
The vast majority of Expectations are
high for larger deals.
respondents project that 2017
will mark a rebound in M&A
activity. Seventy-one percent
of corporate respondents and
86 percent of private equity

Deal characteristics
investors anticipate an uptick in
transactions. An overwhelming
majority of those surveyed
expect activity to stay the
same or ramp up, while only
three percent foresee deal flow
slowing in 2017.
Do you expect the average number of deals that your
company closes to increase over the next 12 months?

Private equity investors

Yes
Corporate executives
Type

Yes
Plan for an uptick
in divestitures.
86%
71%

No No
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Volume Size Type


Overall, 23 percent of Not only does the survey Theres an even split among Respondents at corporations
respondents anticipate a show that M&A activity is corporate respondents who with more than $1 billion in
significant increase in deal poised to rebound in 2017, but say they will be seeking major, revenue intend to divest at
volume in 2017slightly more expectations are high for larger transformational deals and those a higher rate (79 percent)
on the corporate side (24 deals: 64 percent of current seeking smaller strategic ones, than those with less than $1
percent) than private equity respondents say they anticipate with 27 percent of respondents billion (70 percent). Corporate
investors (20 percent). To put the average size of transactions picking one or the other. One in respondents are most likely to
that in perspective, 60 percent in 2017 will exceed the size of five respondents were on the divest primarily due to changes
of respondents say they closed transactions in 2016. Ninety- fence, saying theyll respond in their strategy (22 percent)
at least six deals in the past 12 seven percent believe that deal reactively to any opportunities and secondarily to reduce debt
months, and 21 percent closed size will either be the same or that arise. or raise capital (18 percent).
more than 11. The aggregate increase in the year to come.
value of the deals closed in the Divestitures will be in vogue in On the private equity side,
past year exceeded $1 billion for Do you expect the enterprise size of your rm's deals 2017. Some 73 percent of both more than half (55 percent) see
to increase or decrease over the next 12 months?
about three in ten respondents corporate and private equity strategic sales as the primary
(29 percent). Increase 64% respondents plan to sell units type of portfolio exit, with
Stay the same 33% or assets in 2017, up from 48 about 23 percent anticipating
While the expectation for a Decrease 2% percent reported in the mid-year a sale to another private equity
significant increase in deal Not sure 1% 2016 report and only 31 percent firm and 20 percent expecting
activity is split fairly evenly in our 2015 M&A Trends report to tap the public markets for an
among corporations of all sizes, (when only corporate executives initial public offering to exit a
Do you expect the average number of deals that your
larger private equity funds were surveyed on this question). position. Anticipated IPO exits
company closes to increase or decrease over the next
significantly outpace smaller 12 months? Respondents are more certain have continued to decline since
funds in anticipating a big bump of their plans; only six percent we first asked this question in
Private equity investors
in deal activity. More than 31 of all respondents say they are 2015 (38 percent in 2015 and
percent of respondents from 78% uncertain about plans to divest, 32 percent in our 2016 mid-year
private equity funds larger than down from 20 percent in 2015. survey).3
$1 billion say they expect a 55%
significant increase, compared
to only nine percent of those at 31
Do you expect your company to pursue divestitures over the next 12 months?
funds smaller than $1 billion. 73%
Private equity respondents 12
also expect a greater focus on 9 10 4
0
bolt-on acquisitions to their ++ + o
1

1 49% 48%
existing portfolio companies in Increase No change Decrease

the next year (56 percent expect Under $1 billion Over $1 billion 31% 40%

an increased focus on platforms 20%


21%
with planned bolt-on acquisitions Percentage of private equity investors who say they 11%
to build scale). expect the average number of deals to increase 6%
signicantly
2015 2016 2017
Under $1 billion 9%
Over $1 billion 31% Yes No Not sure
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M&A Trends| Year-end report 2016 M&A Trends| Year-end report 2016

Industry Which industries do you think will converge with technology


in the next two years?

convergence Telecommunications
29%
Asset management
2%

Survey results indicate that providers to combine and 10 Professional services Banking & securities
2%
respondents are virtually percent anticipate technology 10%
unanimous in anticipating companies to converge with
industry convergence as companies in professional
Manufacturing Health care plans
a continuing trend in the services, energy and resources, 2%
10%
coming two years, with only media and entertainment, and
one percent disagreeing. manufacturing.
Media & entertainment Real estate
Not surprisingly, technology In addition to technology, 10% 2%

is seen as the top sector for respondents expect much of the


convergence, with 26 percent convergence to happen in cross-
Energy & resources Pharma/life sciences
of respondents declaring it related sectors. For example, 1%
10%
their top pick. roughly 84 percent of the deals
in the life sciences and health
Why technology? As well see care space will take place among Construction Insurance
later in this report, acquiring life sciences, health care, and 8% 1%

technology assets has surged pharma companies.


to a virtual tie (with expanding
Retail & distribution Not-for-prot
customer base in existing Undoubtedly, digital disruption,
8% 1%
geographic markets) for the changes in government
number two spot as the regulation, and the continuous
main strategic driver for pursuit of growth will likely Health care providers
M&A, more than tripling in see this trend of industry 4%
importance since our mid-year convergence continue for the
2016 survey. In this survey, foreseeable future.
29 percent of respondents
expect technology and telecom

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M&A Trends| Year-end report 2016 M&A Trends| Year-end report 2016

Headwinds
While survey respondents actually drive transaction activity How has Brexit Other obstacles that could Interestingly, corporate CEOs
(Britain's vote
were clearly optimistic about in both the United Kingdom (UK) to exit from
impede the flow of deals and operating partners are
the potential for a surge and Europe rather than impede the EEC) include volatility in the capital more focused on anti-trust
in M&A activity, they also deal activity. Only 12 percent of impacted your markets, which ranks second and interest rate concerns as
M&A strategy?
pointed to several factors all respondents anticipate fewer among corporate respondents potential obstacles to deals than
that could thwart deal flow in deals in the UK, and nine percent 46%
48% (20 percent of corporate other executives. These top
44%
the months ahead, including expect fewer deals in Europe in 43% respondents), followed by deal executives are less concerned
global economic uncertainty the coming year as a result of valuations. Given historically with valuation than executives
and higher deal multiples. Brexit; 46 percent foresee Brexit high valuation multiples, it in supporting finance roles.
spurring accelerated deal making was surprising that 40 percent We will continue to watch this
Global economic uncertainty in the UK, and 48 percent see 12% of respondents say that deal area as the new US presidential
9%
tops the list of potential it triggering more deal activity price multiples will be stronger administration takes office.
deal obstacles over the next in Europe..4 both for private and public
UK Europe
12 months, though fewer transactionswith significantly
respondents cite this concern More deals higher responses (47 percent)
than in our prior survey. No impact on the private equity side.
In our mid-year 2016 M&A Fewer deals
How do you see deal price multiples changing over the
Trends Report, 32 percent of What are the likely inuences on Interest rates are another next 12 months?
corporate respondents cited your company's ability to pursue, potential obstacle to a companys
nance, and close deals in the next
global economic concerns as 12 months. ability to pursue and finance Weaker across Weaker only Stronger only
the board for private for public
the number one obstacle to deals, though the level of concern deals 47% deals

M&A activity, which has since Corporate executives Global market uncertainty fell from 21 percent of the
Interest rate environment 37%
decreased to 27 percent in the respondents in the mid-year
latest survey. Anti-trust issues 2016 survey to 17 percent in
32% this survey. Anti-trust issues
For example, though the verdict were less of a concern (moving
27% 14 12
15 14
is still out on the impact of from 12 percent to eight percent 9 14
7
11
the United Kingdoms vote to 21% in the recent survey), though 4
2 7 6

leave the European Union, 17% respondents at private equity


No change Weaker only Stronger Stronger
respondents say that Brexit will 12% 7% firms larger than $1 billion cite for public across the only for
deals board private deals
Fall 2016
anti-trust issues nearly four
Mid-year 2016
times more than respondents Private equity investors Corporate executives
at firms below that threshold.
14 15
M&A Trends| Year-end report 2016 M&A Trends| Year-end report 2016

Impediments
to success
About 20 percent point to the Technology firm respondents
Most respondents (84 percent) deals did not yield the expected
economy (manufacturing firms feel more strongly than others
say at least some of their value or return on investment
and energy companies feel about execution and integration
2015 and 2016 deals didnt within the past two years. The
the hardest economic pinch in gaps being the main reasons for
generate the expected value manufacturing industry followed
relation to their transactions). underperformance in deals.
or return on investment. just behind at 86 percent.
After that, they cited (in order):
Overall, about 75 percent of
expected sales not materializing,
The technology, media corporate respondents say deals
market or sector forces, and
and telecommunications fell short of expectations.
execution and integration gaps.
sectors expresses the most
disappointment over deal Respondents note a host of
Effective integration remains the
performanceabout 91 percent factors to account for deals that
top-ranked factor by corporate
of survey respondents say didnt live up to expectations.
respondents in achieving a
What is the most important factor in achieving
successful M&A transaction,
a successful M&A transaction for your company?
with about 23 percent ranking
What is the biggest impediment to achieving a successful M&A transaction for your company?
it as the most important driver. Eective integration 22%
88% This category has consistently Economic certainty 19%
83% 81% 81% 78%
73
79
75 77
74
78 maintained one of the top two Accurately valuing a target 19%
71 71 71
61 spots in the past three surveys.
Proper target identication 17%
Accurately valuing a target and
Sound due diligence process 12%
economic certainty tie for the
Stable regulatory and 11%
number two spot. Due diligence legislative environment
remained an important factor.

Insucient Improper target Not valuing the Changing Failure to


due diligence identication target accurately regulatory and eectively
process legislative integrate
environment
2015 Mid-year 2016 Fall 2016

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M&A Trends| Year-end report 2016 M&A Trends| Year-end report 2016

5
Europe

Looking abroad Top five markets


(excluding UK, Germany, France, Italy, Spain)

2015 16%
for outbound deals Mid-year 2016 16%
Fall 2016 22%

For US-based investors, 2017 populous nation. Japan jumps 1 3


is likely to be a year of globe- to the number four slot with Canada
China
hopping. More respondents a survey reading of 24 percent,
2015 22%
are looking for M&A deals a single percentage point 2015 24%
Mid-year 2016 24%
abroad than in prior years, behind China. Mid-year 2016 24%
Fall 2016 40%
and they are focusing on a Fall 2016 25%
select cluster of countries It is worth noting that among
and regions. private equity respondents,
the UK was the most attractive
More than 90 percent of foreign market with 40 percent
respondents say that at least of respondents choosing the
some of their companys M&A region compared to 29 percent
deals will involve acquiring of corporate respondents.
targets operating principally in
foreign marketsup from 77 Looking ahead, energy and
percent in our mid-year 2016 resources companies have
survey. Almost four in 10 say at the strongest appetite for
least 40 percent of their targets international deals. Among 24
will be domiciled abroadup international markets included
from about 31 percent recorded in the response choices, energy
United Kingdom
in our mid-year 2016 report. and resources was ranked as
2015 21%
the number one most likely
Mid-year 2016 21%
Canada ranks first among sector for M&A growth in 17 of
foreign markets poised for those markets; with 56 percent Fall 2016 31%

transactions, with 40 percent of firms looking to Canada for 2


citing it as a target market. opportunities while 44 percent
Japan
The UK ranks second, with 31 target Australia.
14% 2015
percent. China rounds out the
14% Mid-year 2016
top three, with one quarter of
respondents hoping to pursue 24% Fall 2016

deals in the worlds most 4

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M&A Trends| Year-end report 2016 M&A Trends| Year-end report 2016

Strategic drivers Cash is king


Overall, the top three Expanding the customer base Over the past several to the survey, corporations
strategic drivers for corporate in existing geographies ties years, corporate cash will primarily seek merger and
mergers and acquisitions with technology acquisition reserves have consistently acquisition opportunities
were fairly evenly distributed, for the number two slot with increased; 65 percent of (43 percent).
although results showed an 19 percent. That number, survey respondents (up
increased focus on acquiring however, has dropped steadily from 58 percent in the mid- Forty-three percent of
technology assets, which was from 29 percent in 2015 and year 2016 survey) said their corporate respondents, up
not apparent in the past 23 percent in the mid-year cash reserves have grown. from 30 percent in the mid-year
two surveys. 2016 survey. 2016 and 26 percent in 2015,
These responses are consistent say the leading use for their
Expanding product offerings or Though talent acquisition ranks with overall US reserves, where cash is new deals. In contrast,
diversifying services ranks as lower in strategic importance cash balances for the S&P 500 in the mid-year 2016 survey, 35
the top strategic driver with 22 with only eight percent of (excluding financial companies) percent of respondents said
percent of respondents citing it respondents citing it as their stood at $1.456 trillion at the they would use their cash to
as the most important aspect top reason, results have end of the second quarter of invest in their businesses.
of their M&A strategy, signifying doubled from four percent in 2016.5 That balance marked the
a steady growth in importance the mid-year 2016 survey. second-largest cash hoard in at Back in 2015, organic
over the past surveys. least 10 years, and the only time investments were far more
corporations (ex-financials) had popular than seeking M&A
The acquisition of technology more cash in recent times was opportunities (45 percent to 30
surges in importance to tie for the first quarter of this year.6 percent). Now the opposite is
number two, with 19 percent With respect to your company's M&A strategy over truecorporations favor M&A
the next 12 months, what is the most important?
citing it as the most critical What do companies plan to deals over organic investments
driver. To put that in perspective, Expand / diversify your 22% do with all that cash? According by almost 50 percent.
only six percent citied it as a products or services

driver in our mid-year 2016 Expand customer base in 19%


existing geographic markets
reporta more than three-fold
What is the primary intended use of your company's excess cash reserves?
Technology acquisition 19%
increase in importance in less
43% 45%
than a year. Only seven percent Enter new geographic markets 14%
cited technology acquisition as Pursue cost synergies or scale 9% 35%
30 30
eciencies
a driver back in 2015. 26 16
Obtain bargain-priced assets 8% 15 16
9 9 1 3
Talent acquisition 8% 13 4
1 30 1

1 1 0
Seek mergers Invest Buy One-time Not Don't Other
& acquisitions organically back stock dividend applicable know

20 2015 Mid-year 2016 Fall 2016 21


M&A Trends| Year-end report 2016

Meet the team About the survey


From September 1220, 2016, OnResearch, a market research
Russell Thomson
firm, conducted a survey on behalf of Deloitte and polled 1,000
Partner
executives750 at US-headquartered corporations and 250 at
Deloitte & Touche LLP
domestic-based private equity firms, to gauge their expectations
rthomson@deloitte.com
for M&A activity in 2017 and better understand their experience
with prior transactions.

All survey participants work in either private equity firms, or private


or public companies with annual revenues of $10 million or greater.
Trevear Thomas The participants consist of senior executives (director-level or higher)
Principal involved in M&A activity. One-third of corporate respondents work in
Deloitte Consulting LLP the C-Suite.
trethomas@deloitte.com
The corporate respondents represent 18 industries, with technology,
professional services, construction, banking and securities, and
industrial and consumer products accounting for roughly half the
total in aggregate. Most of the corporate respondents (63 percent)
Mark Garay work at private companies. Forty one percent of respondents work at
Managing director organizations with less than $500 million in revenue and 35 percent
Deloitte Services LP are at companies valued at $1 billion and over. The remaining 25
mgaray@deloitte.com percent are in the middle.

On the private equity side, there is also a wide distribution; 31 percent


control funds larger than $3 billion, while 30 percent are below $500
million and the remaining 39 percent consist of medium sized funds
between $500 and $3 billion in size. Half the private equity firms have
Follow us on Twitter @DeloitteMnA 20 or more companies in their portfolio, and nearly three-in-ten had
more than 40.
Access the full report: www.deloitte.com/us/ma-trends-report

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M&A Trends| Year-end report 2016

Endnotes
1. http://www.usatoday.com/story/money/2016/03/24/sorry-wall-street-m-
down-40/82174880/

2. http://www.wsj.com/articles/merger-deals-set-monthly-record-even-as-election-
looms-1477614934

3. This survey offered a new response option of sale to another private equity firm.

4. This survey was administered in September, prior to UK High Court ruling that
Parliament must give its approval before the Brexit process can begin.
http://www.nytimes.com/2016/11/04/world/europe/uk-brexit-vote-parliament.html

5. http://www.factset.com/websitefiles/PDFs/cashinvestment/cashinvestment_9.26.16

6. http://www.bloomberg.com/news/articles/2016-05-20/cash-stuffed-balance-sheets-
can-t-match-even-bigger-debt-loads

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