M&A Index Q32014

The Deloitte
Rising animal spirits continue to
stoke M&A activity
Key points
Following the sharp rebound in deal volumes in Q2, Deloitte forecasts a continued uptick
for Q32014, bolstered by strong economic results and renewed market condence.
We expect global deal volumes to reach around 8,350by the end of Q32014,
up 9% over the same period in 2013.
The IPO boom continues and in H12014companies have raised proceeds of
$103billion which is a 20per cent increase over the same period in 2013.
However,our analysis shows IPO proceeds earmarked for investment in growth are
declining, which may prompt closer investor scrutiny.
The animal spirits are spilling over to M&A markets and we are seeing the return
of hostile bids.
Contacts
Iain Macmillan
Head of UK M&A
02070072975
imacmillan@deloitte.co.uk
Sriram Prakash
Head of M&A Insight
02073033155
sprakash@deloitte.co.uk
About the Deloitte M&A Index
The Deloitte M&A Index is a forward-looking indicator that forecasts future global M&A deal volumes and
identies the factors inuencing conditions for dealmaking. TheDeloitte M&A Index has an accuracy rate of over
90% dating back to Q12008.
Figure 1. The Deloitte M&A Index
Global M&A deal volumes
6,500
7,000
7,500
8,000
8,500
9,000
9,500
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Quarter
Deloitte M&A Index (projection) M&A deal volumes (actuals)
Q3 2014
M&A deal
forecast
High: 8600
Low: 8100
Mid: 8350
The Deloitte M&A Index Q32014 2 |
The IPO boom continues
The IPO market continues to perform strongly
underlining the continued market condence
while a number of high prole listings are still
due to take place this year across a number
of sectors. Yearto date, over 700companies
have come to market globally totalling 53%
of 2013volumes, the highest recorded rst
half IPO volumes since 2011. Companieshave
raised proceeds of $103billion which is a
20per cent increase over the same period
in 2013.


however, only small amounts of the
IPO proceeds are being channelled
towards growth
An interesting feature of the IPO surge in 2014is
that only a modest amount of the proceeds are
being channelled towards growth. Whenwe
analysed the disclosed use of the proceeds, we
observed that in 2014only 14.5% is earmarked
for capex activities, 1% for working capital
and 8% for future M&A activities. Inaddition,
we found nearly 34% of the proceeds were
channelled towards general corporate purposes,
an 8% increase over 2013. Itseems companies
are taking advantage of the favourable
conditions to raise equity, but have not yet
decided how they want to use the proceeds.
However, there are signicant variations across
geographies. Companieslisting in Asia-Pacic have
earmarked nearly 37% for capex, as compared to
21% by North American companies and a meagre
4% by European companies. Onthe other hand,
European companies have earmarked around
11% for M&A activities, compared with just
0.4% for North American companies.
With recent turbulence in the post-IPO performance
of some companies, as well as some withdrawals,
we expect investors may require companies to
show greater transparency and clarity on how
they plan to use proceeds to fund growth.
Factors inuencing M&A in Q32014
0
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100
150
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450
0
500
1,000
1,500
2,000
2,500
3,000
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IPO issuance ($bn) Deal volumes
Year
Volumes Sum of proceeds
Source: Thomson Reuters; Deloitte analysis
Figure 2. Global IPO volume and issuance ($bn) (H1 2007 H1 2014)
Figure 3. YoY percentage change in IPO proceeds (2013 v 2014)
-15 -10 -5 0 5 10
General Corp. Purp.
M&A
R&D
Balance Sheet
Investments
Others
Payment-
Shareholders
Capex
Working Capital
Repay debt
% change of total proceeds (percentage points)
Source: Thomson Reuters; Deloitte analysis
-14.1%
7.9%
2.6%
1.4%
1.1%
0.7%
-0.1%
-0.3%
-0.4%
-1.1%
The Deloitte M&A Index Q32014 3 |
Withdrawn deals
The M&A market saw $216billion of
withdrawn deals within the rst six months of
the year. Deloitteestimates that on average
around 3% of deals are withdrawn each year
and 2014is no different. Thekey difference
this year is that a handful of high prole deals
account for the majority of the withdrawn
deal values. Forinstance, one high prole
pharmaceutical deal alone accounts for
43% of total withdrawn deals by value.
Animal spirits
Such high prole deal withdrawals also
point to a trend of rising hostile bids. Itis
indeed striking that of the deals that were
withdrawn this year, the average premium
offered was 27x compared with the average
deal premium of just 13x for announced
deals. Lookingahead, it seems likely that
getting deals to completion, particularly for
larger deals, is going to get more complex
due to increased political and regulatory
scrutiny, wider stakeholder interests and rising
valuations. Goinghostile is an expensive
alternative and fraught with problems, but it
also indicates that animal spirits are returning.
Factors inuencing M&A in Q32014
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180
Figure 4. Withdrawn deal volumes and disclosed deal values ($bn)
(Q1 2008 Q2 2014)
Deal volumes Disclosed deal values ($bn)
Quarter
Source: Thomson Reuters; Deloitte analysis
Disclosed deal values ($bn) Deal volumes
0
20
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60
80
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120
140
0
10
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40
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Figure 5. Disclosed deal values and deal premiums of withdrawn deals
(Q1 2010 Q2 2014)
Disclosed deal value ($bn) Deal Premium
Quarter
Source: Thomson Reuters; Deloitte analysis
Deal Premium Disclosed deal value ($bn)
2
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1
The Deloitte M&A Index Q32014 4 | 5 |
Analysis of the S&P Global 1200company
fundamentals yields four key insights.
First,average revenue growth fell from
0.2% in Q42013to -0.2% in Q12014with
corporates struggling to keep pace with
analyst earnings estimates.
Second, overall average cash in hand
increased from $6.2billion in Q42013to
$6.5billion in Q12014. However,average
cash held by US corporates fell by $209million
per company while European and Asia-Pacic
corporates increased their cash reserves by
$372million and $1.6billion respectively.
The drop in US cash reserves can be attributed
both to severe weather disrupting output and
a two-speed recovery in the M&A markets,
with US companies leading the way.
Third, average dividend payments increased
from $164million in Q42013to $188million
in Q12014continuing the trend of returning
cash to shareholders.
Finally, average capital expenditure saw a
sharp fall from $535million to $403million
after four consecutive quarters of increased
investment. Muchof this fall can be attributed
to energy and resources companies shrinking
their capital intensive projects.
Corporate barometer
Figure 6. Company fundamentals (S&P Global 1200) (Q4 2013 vs.
Q1 2014 average)
Source: Bloomberg; Deloitte analysis
Q4 2013 average Q1 2014 average
Average cash in hand ($bn)
Average EPS ($)
YoY average revenue growth (%)
Average dividend paid ($m)
Average capital expenditure ($m)
Average FCFF ($m)
0
0
-5
0
400
400
10
1.5
5
250
600
600
6.2
6.5
0.7
0.9
0.2
-0.2
164
188
535
403
420
542
The Deloitte M&A Index Q32014 5 |
Geographies
Two-speed M&A recovery
Since Q12013, North America has been
gaining M&A market share over other
geographic regions. Theirmarket share has
increased from 37% of involvement in global
M&A deal volumes to 43% in Q22014.
NorthAmerican rms have also been involved
in 58% ($427billion) of all disclosed deals by
value in Q22014.
Despite the severe weather related setbacks
which saw the US economy shrink 2.9% in the
rst quarter, US companies are at the forefront
of dealmaking and have record levels of cash
held overseas. Specically,US acquisitions
account for 55% ($404billion) of all disclosed
deal values in Q22014, more than any other
geographic region.
Europe a target for US companies
After years of tepid growth, European
companies appear sub-scale compared to
their peers and may now be attractive M&A
targets for global competitors. US companies
are particularly acquisitive; in Q22014they
recorded the highest deal values into Europe
since Q22012. Muchof this increased deal
activity can be attributed to the large cash
reserves that US companies are holding
overseas and, with high tax levies imposed
on repatriating cash back to US, they have
started spending it more aggressively in
Europe. ManyEuropean countries have lower
corporate tax rates than in the US making the
prospect of tax inversion particularly attractive.
Year-to-date, US companies have spent
$89billion on European companies and we
expect them to spend in excess of $150billion
on European deals this year.
Figure 7. US dealmaking versus other geographic regions (Q1 2013 Q2 2014).
0
10
20
30
40
50
60
2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2
Market share (%)
Quarter
United States Europe Asia-Pacic
Africa & Middle East
Source: Thomson Reuters; Deloitte analysis
South America
Figure 8. US acquisitions into Europe (Q1 2008 Q2 2014)
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Deal volumes Disclosed deal values ($bn)
Source: Thomson Reuters; Deloitte analysis
0
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Deal volumes Disclosed deal values ($bn)
The Deloitte M&A Index Q32014 6 | 7 |
Positive signs of M&A recovery across
sectors
M&A deal volumes and disclosed deal values
have increased in every major industry
sector except for nancial services in
H12014compared to H12013, signalling a
step-change in the M&A environment.
The biggest benefactor of increasing deal
activity has been the TMT sector which has
seen H12014deal volumes increasing 18%
year-on-year and disclosed deal values up
187%. TheTMT sector is currently sitting on
cash piles of over $1trillion and continued
M&A and consolidation is highly likely.
The life sciences and healthcare sector has
seen a signicant increase in dealmaking with
disclosed deal values up 369% year-on-year.
Thepatent cliff is one of the primary drivers
behind this surge. Thetop 12pharmaceutical
companies globally are due to be hardest hit
and are expected to lose $50billion of global
sales.
1
Companies are also using M&A to
focus on preferred therapeutic areas and are
doing so through asset swaps, divestments of
non-core businesses and partnerships.
Sectors
Source: Thomson Reuters; Deloitte analysis
Figure 9. Global deal values by sector (H1 2013 v H1 2014)
0
50
100
150
200
250
300
350
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Disclosed deal values (US$bn)
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Quarter
Source: Thomson Reuters; Deloitte analysis
Figure 10. Global deal values and volumes in life sciences and healthcare sector
(Q1 2008 vs. Q2 2014)
0
50
100
150
200
250
-
100
200
300
400
500
600
Deal volumes Disclosed deal values ($bn)
Deal volumes Disclosed deal values ($bn)
1 Evaluate, Evaluate Pharma World Preview 2013
The Deloitte M&A Index Q32014 7 |
Charts we like
Figure 11. UK unemployment gures (2000 2014E)
Unemployment numbers (million) Unemployment (%)
4.0
5.0
6.0
7.0
8.0
9.0
1
1.2
1.4
1.6
1.8
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E
Unemployment number (millions) Unemployment %
Year
Source: Economist Intelligence Unit; Deloitte analysis
Figure 13. S&P Global 1200 cash by geography
(Q1 2008 Q1 2014)
Source: Bloomberg; Deloitte analysis

200,000
400,000
600,000
800,000
1,000,000
1,200,000
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Asia-Pacic Europe US
Corporate cash (US$m)
Figure 15. S&P Global 1200 spend on dividends vs. capex
(2000 YTD2014)
Source: Bloomberg; Deloitte analysis
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Figure 12. S&P Global 1200 headcount growth (2001 2014YTD)
Headcount
Year
Source: Bloomberg; Deloitte analysis
-10%
-20%
0%
10%
20%
30%
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2001 2005 2007 2009 2011 2013 2003
Headcount growth (%)
Figure 14. S&P Global 1200 revenue growth vs. share price
(2001 2013)
Source: Bloomberg; Deloitte analysis
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S&P Global 1200 index Revenue growth (%)
Figure 16. S&P Global 1200 M&A spend as % of market cap
(2000 2013)
Source: Bloomberg; Deloitte analysis
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About the Deloitte M&A Index
The Deloitte M&A Index is a forward-looking indicator that forecasts future global M&A deal volumes and
identies the factors inuencing conditions for dealmaking.
The M&A Index is created from a composite of weighted market indicators from four major data sets:
macroeconomic and key market indicators, funding and liquidity conditions, company fundamentals, valuations.
Each quarter, these variables are tested for their statistical signicance and relative relationships to M&A volumes.
As a result, we have a dynamic and evolving model which allows Deloitte to identify the factors impacting
dealmaking and enable us to project future M&A deal volumes. TheDeloitte M&A Index has an accuracy rate of
over 90% dating back to Q12008.
Notes: In this publication, references to Deloitte are references to Deloitte LLP, the UK member rm of DTTL.
About the authors
Sriram Prakash and Russell Shoult are the UK Deloitte Insight team for M&A, based in London.
HaranathSriyapureddy, Abhimanyu Yadav and Sukeerth Thodimaladinna are M&A analysts in the Business
Research Center at DTTL.