Ernst & Young Transaction Advisory Services Anticipates Smaller, Higher Quality Deals as Confidence and Credit Return to the Market in the Second Half of 2010

NEW YORK, June 23 /PRNewswire/ -- Global merger-and-acquisition (M&A) deal value was $810.3 billion during the first half of 2010, similar to last year's $814.6 billion for the same time period.(1) Deal activity should pick up, however, as market fundamentals are strengthening and businesses that have conserved cash are implementing growth plans that were on hold during the recession. In addition, other businesses are looking to sell business units that are more valuable to someone else in order to raise cash. Strong growth prospects in markets such as Brazil and China should also portend a continued rise in deal volume in the second of 2010, despite concerns over instability in other developed markets, according to Ernst & Young LLP's Transaction Advisory Services practice.

"During the first half of 2010 deal activity was tempered by mixed signals in the market," said Rich Jeanneret, Ernst & Young LLP, Americas Vice-Chair, Transaction Advisory Services. "We're seeing a strong deal pipeline," said Jeanneret. "As we look towards the second half of 2010, we expect to see well-capitalized corporations and private equity firms continuing to put their money to work in select growth markets. Many companies with improved access to funding are looking to enter new markets or expand their geographic reach."

According to a recent Ernst & Young study of over 800 senior executives around the world, 57% of businesses state they are likely or highly likely to acquire other companies in the next 12 months, almost double that of the 33% surveyed in November 2009. In fact, 47% expected to do so in the next six months, compared with 25% when surveyed eight months ago.(2)

The two drivers of deals will be cash available to corporations and low interest rates. The Fortune 1000 are sitting on $1.8 trillion(3) of cash, and interest rates have fallen to historic lows, allowing the right companies to borrow at attractive terms and PE firms to get back in the game.

Announced M&A in BRIC countries was up nearly 60% for the first half of 2010, although slightly fewer deals have closed this year versus last year. Brazil made up nearly 4% of global activity during the first half of 2010, compared to less than 3% from the same period last year, while M&A in China also made up nearly 4% of global activity, staying roughly the same as last year.(4)

"Brazil is an attractive destination for global companies and PE firms looking capitalize on the country's solid growth prospects," Jeanneret noted. "A growing middle class and burgeoning domestic consumption coupled with strong fundamentals yield a dynamic environment for growth and investing."

Cash Management

"Corporations focused on cash management to an unprecedented degree during the recent financial crisis," said Stephen Payne, Americas Practice Leader for Ernst & Young LLP's Working Capital Advisory Services (WCAS) in the US. "However many companies have not moved beyond short-term or tactical efforts to institute policy and process changes that would result in sustainable working capital improvements. A significant amount of cash remains tied-up." The 2,000 largest companies in the US and Europe may still have up to US$1.1  trillion of cash unnecessarily tied up in working capital - the equivalent of nearly 7% of sales for these businesses, according to All tied up, the Ernst & Young working capital management report for 2010.

Private Equity

There were 1,339 announced deals valued at $106.8 billion globally involving PE firms during the first half of the year, as compared to 1,281 deals valued at $46 billion for the same period last year, a 132% increase in terms of deal value.(5)

"Through the first two quarters, we've seen a sustained increase in PE activity both on the buy-side and sell-side, as firms continue to take advantage of receptive capital markets," said Jeff Bunder, Americas Private Equity Leader, Ernst & Young LLP. "We have witnessed a marked increase in exit activity through outright sales and IPOs, buy-outs and acquisitions by portfolio companies. We expect these trends will continue, provided the global economic recovery continues its momentum."

In the Americas, for example, PE firms announced $14.1 billion in new acquisitions in May -- the highest monthly total in the last two years. What's more, while there were only six deals that broke the billion-dollar mark in all of 2009, four billion-dollar deals were announced in the last month alone.(6)

"Past recessions have yielded some of the industry's highest vintage returns, and PE firms have a track record of being adaptive and innovative in volatile markets," said Bunder. "We expect to see a steady increase in PE deal volume over the remainder of the year and into 2011 as firms look for opportunities to refinance, sell or grow businesses through acquisition."

Additionally, several public PE firms reported positive earnings in recent weeks, renewing optimism for favorable portfolio exits. For instance, in May, there were 58 global exits by PE houses valued at $8.8 billion and June is off to a promising start.(7)

"During the first half of 2010, deal dynamics shifted from relatively few blockbuster deals in a handful of industries, as we saw towards the end of 2009, to a steady drumbeat of activity across myriad industries, including technology, financial services and healthcare," said Jeanneret. "The energy sector was a standout, with fewer, but larger deals over the past six months."

Technology

Global technology M&A deal activity continues its upward trend with 1,158 total announced deals through 15 June 2010, an estimated increase of 37.0% in technology deal activity for the first half of 2010 compared to a year ago. During the second quarter, 7 deals over $1 billion in disclosed value were announced by mid-June. Compared to the same period in 2009, total deal value increased by 21.9%, while average deal value declined by 10.3%.(8)

Recent technology transaction activity is fueled, in part, by abundant available cash and by the desire to gain competitive advantage. The top 25 technology companies by market capitalization increased their cash, short-term and long-term investments by 33% in 2009, to $350 billion.(9)  Huge cash reserves are giving leading technology companies the financial flexibility to focus on building revenues through organic growth and M&A. These companies are well-positioned to execute on attractive deals that provide entry into new markets and access to new technologies. "Mobile everything" remains a key driver of technology deals, while the "blurring" of technology sectors, platforms and other technology-enabled industries as well as "smart" technology-enabled-innovation around information continue to present new acquisition opportunities. Recent volatility in equity markets may affect whether this upward trend in deal activity and the renewed interest in billion-dollar-plus-deals continue in the near term.

Joe Steger, Ernst & Young's Global Transaction Advisory Services Leader for the Technology Industry says, "The long-term M&A outlook is positive. Technology companies know they must be prepared to respond swiftly to shifts in technologies, markets, customer behaviors and the regulatory environment."

Financial services

During the first half of 2010 US financial services M&A volume declined 26% compared to the same period last year.(10)  Significant regulatory uncertainty will likely continue to impact the financial service industry M&A volume over the next six months, however once finalized may create an impetus for transactions, such as carve outs. Financial institutions are building their capital positions rather than making acquisitions due to the slow US economic recovery and recent economic difficulties in Europe.

A significant part of the financial services industry M&A volume that currently exists is frequently fueled by financial institutions simplifying their business models and divesting non-core businesses. Acquirers of these businesses tend to be specialists in these non-core businesses that can take advantage of economies of scale. Private equity has also reappeared as acquirers of these often less regulated businesses.

European buyers who were active in 2009 in the US M&A markets have a reduced interest in US financial services assets as they deal with economic issues in the euro zone and Eastern Europe and currency volatility which effects relative deal pricing. These formally active foreign buyers are now more frequently sellers of non-core assets.

In asset management, announced deals to date in 2010 are lower than the prior year. However potential financial reform and proposed tax legislation may motivate sellers to monetize private businesses, creating some level of activity in the alternative asset management sector in the coming quarters.  We expect to continue to see transactions as a compliment to organic growth strategies for traditional asset management firms, but at a lower rate than the record levels of assets under management which changed hands in 2009. Outbound interest also appears to be on the rise as asset management firms continue to build scale, distribution and position for global wealth growth in markets such as Asia and Latin America.

Health care

US M&A value in the health care sector is up nearly 67% for the first half of 2010, compared to last year.(11)   The first half of 2010 was defined by smaller, strategic deals fueled by health care reform in the US – a trend that is likely to continue for the remainder of 2010. Passage of health care reform removes some of the previous uncertainty and future spending on health care is expected to increase. An aging population will increase demand for health care services. Consolidation is and will continue to be a means to achieving cost synergies. Relative to other industries, financing for health care deals is more available.

PE is in the game, with health care investors expecting to profit from companies that can create efficiencies, such as health care IT companies and efficient providers.  PE firms and PE-backed operators have shown interest in, and are likely to continue to pursue acquisitions of, not-for-profit hospitals.

Long-term care was the most active provider care sub-sector. Twenty nine percent of total provider care deals from Oct09 to Mar10 were long-term care deals, a 65% increase compared to the previous 6 month period (Apr09 to Sep09).(12)

Home health deals accounted for 13% of total provider care deals from Oct09 to Mar10, a 13% increase compared to the previous 6 month period (Apr09 to Sep09).(13)

In addition to the trends mentioned above, anticipated changes in reimbursement ('payment bundling') are expected to make long-term care and home health operators popular contractual partners or acquisition targets in the next 5 to 10 years.

Energy

M&A activity in the energy and power sector during the first half of 2010 was defined by a relatively limited number of large blockbuster deals, with global deal value reaching $119 billion – up 45% over the prior year. There were 805 deals announced, vs. 787 deals during the same period in 2009.(14)

While credit markets remain tight, deals are getting done through alternative sources of capital, i.e. joint ventures. Energy market sentiment remains relatively positive. There's been growth in investments in natural gas, attracting larger, financially strong international companies such as Exxon. A new Ernst & Young study found from 2005 to 2009, gas reserves increased by 40%, while oil reserves only climbed 2%.(15)

"Energy M&A activity is starting to increase in the deal markets, and we expect that to carry through the second half of 2010, particularly in emerging markets," said Jon McCarter, Ernst & Young LLP, Transaction Advisory Services Leader, Americas Oil & Gas Center. "However, the environment could change significantly with the passage of new energy policy legislation or setbacks in the global economic recovery," McCarter noted.

Conclusion

2010 has started out strong. However, the second quarter of this year saw credit defaults in Europe affecting the global economy, driving investors to look for growth in  developing economies or in  smaller, more strategic deals. Despite this setback, M&A activity accelerated across a range of industries, as PE firms and other companies took advantage of the thawed credit market and strong equity markets. Looking towards the second half of 2010, M&A activity should continue to grow, as well-capitalized firms seek to expand through M&A and from improvement in the debt markets (assuming the economy stabilizes). Expect to see smaller, albeit higher quality deals as confidence and credit returns to the market.

Transaction Advisory Services (TAS)

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Ernst & Young offers integrated, objective advisory services that are designed to help you evaluate opportunities, make your transactions more efficient and achieve your strategic goals. Ernst & Young has an extensive global reach, with 8,700 transaction professionals worldwide, and the experience of thousands of transactions across all markets and industry sectors. We can bring together the people you need, wherever you need them, to focus on helping you achieve success throughout the transaction lifecycle -- and beyond. Whether it's a merger, acquisition, strategic alliance, divestment, equity offering or restructuring, we offer you the advice you need to help you make the right deal at the right price at the right time. It's how Ernst & Young makes a difference.

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SOURCE Ernst & Young LLP