Yet, nearly 90 percent of corporate respondents say some portion of deals fail to generate value
According to the findings of the inaugural Deloitte M&A trends report 2014: A comprehensive look at the M&A market, the vast majority of the 2,500 U.S. companies and private equity firms polled anticipate a sustained or accelerated pace of mergers and acquisitions (M&A) over the next two years.
Building from the modest rebound of M&A activity in 2013 and the solid rise of deals in the first quarter of 2014, 84 percent of corporate executives surveyed expect a sustained or increased pace of M&A activity in the next 24 months. Forty percent of the total corporate executive respondents forecast a pick-up in deal flow. In line with this forecast, the vast majority (89 percent) of private equity leaders surveyed are expecting average to high deal activity going forward.
"Given the large amount of cash on corporate balance sheets and low interest rates, and as long as the stock market is steady and rising, the environment is ideal for M&A," said Tom McGee, deputy chief executive officer of Deloitte LLP. "We've seen robust activity recently, and barring a significant geopolitical or other unforeseen event, the stage is set for continued momentum in transaction activity."
The Deloitte survey provides insight not only into the future of M&A activity, but also the key factors around deal dynamics. Respondents offered a note of caution among the general deal exuberance. Nine-in-10 corporate executives believe that at least some portion of past deals failed to generate the expected return on investment, providing a sobering reminder of the complexity associated with integrating after an M&A transaction. Corporate executives pointed to execution gaps or failure to capture synergies (28 percent) while private equity respondents cited economic forces (32 percent) as the most likely reason a deal fell short. Moreover, the majority of corporate (55 percent) and private equity respondents (54 percent) cited the failure to integrate effectively as a top area of concern in pursuing a deal.
Deal Expectations and Size
A significant majority (79 percent) of private equity firms expect deal size to increase and more than half (58 percent) expect the coming year to bring more club deals, enabling firms to limit exposure on large deals. Aiding increased deal activity, private equity leaders plan to accelerate divestments of portfolio companies with 64 percent of the respondents anticipating strategic sales within the next 12 months. The stock market was strong during the survey period, which may have been a factor in the heightened interest in IPOs. Thirty-six percent of private equity respondents forecasted this type of exit strategy.
Looking closer at the expectations for corporate M&A:
About one-fifth (21 percent) of respondents, primarily large companies, plan to pursue major transformational deals, while smaller strategic deals are the most popular (32 percent) among corporate executives.
Thirty percent of respondents said they would use the high levels of cash on their balance sheets to finance M&A transactions.
The most popular motivators for deals are expanding customer base in existing geographies (43 percent), pursuing cost synergies or scale efficiencies (32 percent), and entering new geographic markets (31 percent).
Data Analytics Plays Differing Roles
Both corporate and private equity executives use data analytics in the M&A process; however, frequency of use differs between the two populations. The vast majority (71 percent) of private equity firms use data analytics as a core component or in select areas of M&A analysis, whereas a smaller majority of corporate executives (58 percent) use data analytics in this way.
The reason for the gap in usage rates may be due to several impediments seen by the corporate side including complexity (30 percent), time required for analysis (20 percent), and unwillingness of seller to provide information (20 percent).
Overseas Markets, Sectors Focus of Activity
M&A Trends Report 2014 respondents from both groups ranked similar markets as key targets for transaction pursuits:
Among private equity leaders, the top five overseas markets are the U.K. (33 percent), China (31 percent), Canada (30 percent), Brazil (24 percent), and Japan (18 percent).
The top five overseas targets for corporate executives include China (33 percent), Canada (26 percent), the U.K. (25 percent), Brazil (23 percent), and Mexico (20 percent).
As it relates to sectors, corporate executives anticipate deal activity to increase most heavily within the technology sector, followed by health care providers and plans, energy (both alternative energy and oil and gas), and banking and securities. More than two thirds (68 percent) of private equity executives expect their firms to become more industry-focused in general over the coming year.
Conclusions
While the factors are all in place for growing M&A momentum, stepped-up activity may not necessarily translate into a larger number of successful transactions. Critical factors that play a role in deal success include strategy and planning (32 percent) for corporate executives and economic conditions (37 percent) for private equity leaders.
"Our inaugural survey sheds light on M&A expectations for the next year and beyond as well as the top target markets and deal motivators among market participants," McGee concluded. "Perhaps even more importantly, it provides insights on what drives deal success, and the steps corporate and private equity executives should focus on to make the most of their investments."
