Corporate buyout activity found itself right at home in boom town this year, with global deal volume reaching $2.8 trillion in the first three quarters of the year. That’s the highest volume for that period since 2007 – as U.S. markets peaked just ahead of the financial crisis.
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Meanwhile, the number of transactions in the U.S. surged 5.1% with 10,889 deals amounting to $1.6 trillion in volume – a more than 40% increase from 2013, according to data from Ernst & Young.
But if you think that means the deal flow train is about to grind to a screeching halt in 2015 – think again.
“We think it’s going to be another record year,” Dan Tiemann, global head of transaction services at KPMG, said. “To me, the whole market has been awash of capital, easy financing, and whatever else you want to call it, for a while. What changed in 2014 is the consumer and CEO confidence increased.”
Pointing to a recent survey on M&A activity from the firm, Tiemann said what’s going to propel activity higher next year is partly sentiment from this year: 82% of respondents to the survey said they would initiate a deal next year, that’s up from around 63% in 2013.
“This year, a lot of larger deals got done, and there’s a halo effect: Everyone sees companies out there doing big deals, so that gives them more confidence to push and get deals done. As bigger deals are done, it becomes second-screening, you get the spinoff transactions that result,” he said.
Where to Find the Best Deals in 2015
All those trillions of dollars in deal volume had to break down somehow: According to data from Dealogic, the health care, telecom, and real estate sectors led deal activity for the first nine months of the year.
Looking ahead to the New Year, Ernst and Young sees the tech sector as a continued leader in the deal-making environment. The firm says the pace is largely driven by big tech behemoths continuing to figure out the best way forward as they work to compete with more agile counterparts with more of a specialized focus.
“Whether companies are new or old, we’re at a point in time when they are all competing from the same starting line,” Jeff Liu, EY global technology leader of transaction advisory services said in a research note. “The incumbents are no longer in charge, and they will have to race to solutions that are more cloud and mobile based, and more consumer-facing.”
He continued, noting the surge in splits a la IBM’s (NASDAQ:IBM) chip business spinoff, Hewlett-Packard (NYSE:HPQ) splitting itself in two, and eBay (NASDAQ:EBAY) splitting itself from PayPal, is just the beginning.
“Next year, there will still be a range of companies that will be forced to transform through breakups, spinoffs, or going private,” Liu said.
A big driver of deal making in 2014 was activist investor influence – it’s what helped eBay decide to spinoff its payment processing unit, and it was a big part of why Allergan (NYSE:AGN) decided to be bought by Actavis (NYSE:ACT) instead of Valeant (NYSE:VRX).
And EY predicts activist influence will continue to drive momentum in the next year.
“More than ever, shareholder activists are keeping management on their toes,” Rich Jeanneret, Americas vice chair of transaction advisory services said in the report. “We expect to see greater levels of spinoffs, splits, and carveouts over the next year.”
Biggest Risks to Dealflow
Tiemann said the money will follow the volatility in the year to come. Because of that, he predicts the technology and health care sectors to see continued high volume. He’s also throwing energy into that volatility mix next year, citing the recent plunge in oil prices in the face of increased supply thanks in part to the booming U.S. shale revolution.
He expects as capital expenditures and the number of wells drilled declines in 2015, companies will begin to reassess whether that signals a buy or build strategy. In the short term, Tiemann said there could be a drop in M&A volume over a six-to-nine-month period in the energy sector as participants wait to see if the environment is a blip or the new normal, and how that affects the companies depending on whether they’re focused on production or consumers.
“What happens in the energy sector will be the biggest risk to M&A next year,” he said. “The other thing is whether there will be any other big event that will impact confidence and causes people to go back into their shells.”
Added to that, EY said cyber risk is something that could pose a risk to deal making momentum. According to the firm’s latest capital confidence barometer, just 6% of companies are worried about cyber impacts to their businesses, while7% are concerned about that impact on M&A strategy.
“Cyber threats are not just an IT issue – they represent a broader campaign against companies’ key strategic business imperatives,” Jeanneret said. “Management teams need to understand what the ‘threat actors’ want to do with their company’s information and the potential impact a breach could have on revenue, profit, market share, market value, and brand reputation.”
He continued saying this threat is even more acute because economic risks of cyber threats are overlooked oftentimes during diligence and integration processes.
Other than a black swan, Tiemann said the money is there, and the sellers are willing to come to the table…so don’t throw out the confetti just yet, the party seems to be just heating up.
Year in Review: Biggest Deals of 2014
With a burst of transactions in the last year, here are some of the most valuable high-profile deals of the year -- starting from the bottom and working up to the most valuable.
Facebook + WhatsApp
Social giant Facebook (NASDAQ:FB) shocked investors when it announced it would acquire instant messaging platform WhatsApp for a closing value of $22 billion. The move led many on the Street to wonder the motive since the app generated fewer than three cents in revenue for each of its 400 million month active users last year.
Halliburton + Baker Hughes
Halliburton (NYSE:HAL) agreed to buy rival Baker Hughes (NYSE:BHI) in a $38 billion deal to create on of the world’s biggest oil field services companies. Haliburton’s CEO said the transaction is expected to create an annual cost savings of almost $2 billion. This comes as a time when companies like these are up against increased pressure in the face of multi-year low oil prices.
Allergan + Actavis
After a tense back-and-forth between activist investors, Botox-maker Allergan agreed to be bought by Actavis, a generics drug manufacturer, for $66 billion. In doing so, Allergan brushed off what amounted to a failed bid and attempt for a hostile takeover by Valeant Pharmaceuticals for a slightly less amount.
AT&T + DirecTV
In the telecom space, AT&T (NYSE:T) agreed to acquire DirecTV (NYSE:DTV) for just more than $67 billion. The deal is AT&T’s biggest acquisition since a 2006 agreement to buy Bell South for $85 billion. But the deal still faces regulatory approval before it can close in the first half of next year.
Comcast + Time Warner Cable
The biggest announced deal of the year came in at $69.8 billion, a transaction between Comcast (NASDASQ:CMCSA) and Time Warner Cable (NYSE:TWC). It’s expected to close in January, but again, regulators could throw a curve ball, especially as new net neutrality rules begin to come to fruition.