The Deloitte M&A Index 2016: Opportunities amidst divergence · The Deloitte M&A Index 2016:...
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The Deloitte M&A Index 2016: Opportunities amidst divergenceQ4 2015
Record breaking deal values in 2015
We are expecting 2015 to end with over $4 trillion worth of deals making it the highest for deal values since 2007. However, on a last-twelve-months basis, there was a slowdown in the volume of transactions in the second half of 2015.
Figure 1. The Deloitte M&A Index
Deloitte M&A Index (projections) M&A deal volume (actuals)
Q4 2015 M&Adeal forecast
Q4 2015 M&Adeal forecast
8,500
9,000
9,500
10,000
10,500
11,000
11,500
12,000
Q42015
Q32015
Q22015
Q12015
Q42014
Q32014
Q22014
Q12014
Q42013
Q32013
Q22013
Q12013
Q42012
Q32012
Q22012
Q12012
Q42011
Q32011
Q22011
Q12011
Q42010
Q32010
35,000
40,000
45,000
Q42015
Q32015
Q22015
Q12015
Q42014
Q32014
Q22014
Q12014
Q42013
Q32013
Q22013
Q12013
Q42012
Q32012
Q22012
Q12012
Q42011
Q32011
Q22011
Q1 2011
Q42010
Q32010
Global M&A deal volumes
Source: Deloitte analysis based on data from Thomson One Banker
Last twelve months deal volumes
High: 11,600
Low: 11,000Mid: 11,300
Factors influencing dealmaking Divergence in economic growth
After a strong recovery, the US economy experienced a modest slowdown in the second half of 2015 and the IMF cut the US growth outlook slightly. The IMF also expects modest growth in the eurozone, China has missed its growth target, whilst Brazil and Russia have slipped into recession.
In contract, India will be the fastest growing major economy in 2015, and four of the ten fastest growing economies in 2015 are in the ASEAN region.
Such divergence in economic growth means companies need to be actively on the lookout for growth markets and deal opportunities.
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IndiaChinaUKUSEurozone
2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
Figure 2. IMF real GDP growth, actual and forecast (2008-17E)
Source: Deloitte analysis based on data from Bloomberg
GDP growth %
Monetary policies among the major central banks are diverging. In the US, the market is widely expected to have already priced in the gradual increases to the Federal Reserve interest rate. While we do not expect any shocks in the debt market, increase in the cost of credit could lead to a slowdown in the issuance of acquisition-related bonds which globally stands at $282 billion, a 15-year high.
At the same time, the ECB is committed to its quantitative easing programme, which has led to a slide in bond yields.
This presents opportunities for global companies to take advantage of the funding conditions in Europe to raise additional debt.
Factors influencing dealmaking Divergence in monetary policies
Source: Deloitte analysis based on data from Bloomberg
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Figure 3. US vs Germany ten-year government bond yields, 2006-15 YTD
Spread US-Germany (RHS)
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US Generic Govt 10 Year Yield (LHS) Germany Generic Govt 10 Year Yield (LHS)
0%
1%
2%
3%
4%
5%
6%
2015201420132012201120102009200820072006
Factors influencing dealmaking Divergence in corporate performance
S&P 500STOXX® Europe 600
Figure 4. STOXX® Europe 600 Index and S&P 500 Index constituents average net profit margin (%), 2000-14
Source: Deloitte analysis based on data from Bloomberg
0%
2%
4%
6%
8%
10%
12%
141312111009080706050403020100
Since the financial crisis, European corporate earnings have trailed those of the US companies, where they are close to 15 year highs. However, the gap is expected to narrow if European demand picks up following the ECB stimulus. We have already seen European corporate margins increase at a strong pace since 2013, while S&P 500 companies are expected to show three consecutive quarters of declining earnings.
We expect US companies to continue cross-border M&A to offset some of the pressure, and benefit from growth in new markets.
Factors influencing dealmaking Divergence in deal valuations and cash positions
P/E multiples for deals in the US and Asia are well above their 15 year average, whereas in Europe they are still close to their average.
European companies have access to local markets that are expected to grow faster than many other developed economies, making them attractive acquisition targets at favourable deal P/E multiples.
With $1.6 trillion, North American non-financial companies, led by those in the US, have the highest levels of cash reserves in the S&P 1200 Index and this puts them in a strong position to acquire assets in Europe.
Note: 2015 YTD refers to 16 November 2015
Figure 5. P/E deal multiples for US, Europe and Asia-Pacific as a target, 2000-15 YTD
US Europe Asia-Pacific Average
Europe:22.2 on average
US:24.5 on average
Asia Pacific:21.7 on average
Source: Deloitte analysis based on data from Thomson One Banker
15x
17x
19x
21x
23x
25x
27x
29x
31x
33x
2015YTD
201420132012201120102009200820072006200520042003200220012000
Figure 6. Cash reserves of the non-financial constituents of the S&P Global 1200 ($bn), 2008-14
Source: Deloitte analysis based on data from Bloomberg
Asia-Pacific Europe North America
0
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1,000
1,500
2,000
2014201320122011201020092008
Factors influencing dealmaking Impact of Chinese slowdown on M&A markets
Total disclosed deal values ($bn) GDP growth %
Source: Deloitte analysis based on data from Thomson One Banker and EconomistIntelligence Unit
Figure 8. China’s disclosed M&A deal values ($bn) and GDP growth (%), 2000-Q3 2015 LTM
Figure 7. Outbound Chinese M&A deal values into Europe and North America
Outbound deal values Inbound deal values
0100200300400500600700800
Q3
2015
LTM
2014
2013
2012
2011
2010
2009
2008
2007
2006
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2004
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Domestic deal values China’s percentage change in real GDP (%)
0246810121416
$35.5bn
$2.7bn
$8bn$10.7bn
Europe North America2015 YTD 20092009 2015 YTD
The decline in Chinese GDP growth and the shift to a consumption-driven economy is mirrored by a steep increase in M&A activities, both domestic as well as cross-border. So far this year, Chinese companies have spent $65.8 billion in overseas acquisitions, with the majority in Europe. However, there was a decline in the volume of outbound acquisitions made in the E&R and manufacturing sectors, while there was an increase on the part of TMT and consumer business companies.
The slowdown in Chinese growth is expected to have a ripple effect on M&A markets, first in the commodities sector, where consolidation is expected, as well as in commodity exporting nations where activities could slow down. It could also lead to consolidation in sectors such as shipping and logistics which depend on growth in trade.
Factors influencing dealmaking Strong resurgence in Japanese dealmaking
Driven by the weak yen, Japanese corporate profits are at their highest levels in over ten years. At the same time, Japan remains saddled with falling domestic consumption compounded by a decline in real earnings, an aging population and a shrinking GDP.
In response to these pressures, Japanese companies are actively looking abroad for growth prospects.
Figure 9. Japan’s disclosed M&A deal values ($bn)
Source: Deloitte analysis based on data from Thomson One Banker
Outbound Domestic
$56.4bn
$81.4bn
$10.7bn
$46bn
2015 YTD 20092009 2015 YTD
Factors influencing dealmaking Focus on integration
Since the beginning of 2014, companies have announced around $4.9 trillion worth of deals globally.1 We estimate that annualised cost synergies represent, on average, 3-4% of the transaction value. This means that companies have committed to realise between $150-200bn worth of annualised synergies.
If all the announced cost synergies are realised and sustained, this could add an estimated $1.5-1.9 trillion to the value of these companies.
The stakes are therefore high and ensuring successful deal integration is likely to be near the top of boardroom agendas for many months to come.
Figure 10. Expected annual synergies as a percentage of disclosed deal value (%)
Source: Deloitte analysis
Energy & Resources
Professional Services
Life Sciences & Healthcare
Consumer Business
Telecoms, Media & Technology
Financial Services
Real Estate
4.2%
3.7%
3.5%
3.3%
3.29%Averageannouncedsynergies ofdeal value
2.9%
2.9%
1.9%
1.4%
Manufacturing
$4.9trn
Acquisitionpremium
discloseddeal value
upside
integration costs
Targetvalue
before M&A
Targetvalue
before M&A
$200-$250bn
$1.5-$1.9trn value created due to synergies
Figure 10. Expected annual synergies as a percentage of disclosed deal value (%)
Source: Deloitte analysis
Energy & Resources
Professional Services
Life Sciences & Healthcare
Consumer Business
Telecoms, Media & Technology
Financial Services
Real Estate
4.2%
3.7%
3.5%
3.3%
3.29%Averageannouncedsynergies ofdeal value
2.9%
2.9%
1.9%
1.4%
Manufacturing
$4.9trn
Acquisitionpremium
discloseddeal value
upside
integration costs
Targetvalue
before M&A
Targetvalue
before M&A
$200-$250bn
$1.5-$1.9trn value created due to synergies
Figure 10. Expected annual synergies as a percentage of disclosed deal value (%)
Source: Deloitte analysis
Energy & Resources
Professional Services
Life Sciences & Healthcare
Consumer Business
Telecoms, Media & Technology
Financial Services
Real Estate
4.2%
3.7%
3.5%
3.3%
3.29%Averageannouncedsynergies ofdeal value
2.9%
2.9%
1.9%
1.4%
Manufacturing
$4.9trn
Acquisitionpremium
discloseddeal value
upside
integration costs
Targetvalue
before M&A
Targetvalue
before M&A
$200-$250bn
$1.5-$1.9trn value created due to synergies
1. Private Equity involved deals excluded
Factors influencing dealmaking Cross border M&A
Cross-border M&A has been one of the key features of 2015 – so far this year $1.07 trillion in cross-border deals have been announced. Europe has been at the centre of cross-border deals, with European companies participating in 53% of all announced deals. The North America-Europe corridor has dominated, worth $311 billion.
So far this year, the growth markets nations have announced $49.6 billion of acquisitions in G7 nations, whereas the G7 nations have announced only $30.7 billion in M&A deals in growth markets, the lowest in over a decade.
Cross-border deal flow is expected to be a key theme in the coming years, as major economies strike agreements and alliances to bolster trade.
Figure 11. Cross-border deal values by target region ($bn), 2015 YTD
Note: 2015 YTD refers to 16 November 2015. APAC refers to Asia-Pacific; MEA refers to Africa/Middle East
Source: Deloitte analysis based on data from Thomson One Banker
Europe to UK$207.9bn
UK to US$33.8bn
US to APAC$22.5bn
US to Europe$114.1bn
Japan toNorth America
$26.4bnChina toEurope
$35.5bn
Inbound to EuropeNorth America: $150.9bnAPAC: $68.1bn
Inbound to North AmericaEurope: $160.5bnMEA: $48.7bnAPAC: $56.9bn
Inbound to Asia-PacificNorth America: $31.4bnEurope: $9.1bnMEA: $10.5bn
2. The G7 comprises of Canada, France ,Italy, Germany, Japan, UK and US. The growth markets are defined as Brazil, China (incl. Hong Kong), Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey, Saudi Arabia, United Arab Emirates.
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ContactsIain MacmillanManaging Partner, Global M&A Services 020 7007 [email protected] Sriram PrakashGlobal Lead M&A Insight020 7303 [email protected]
About The Deloitte M&A IndexThe Deloitte M&A Index is a forward-looking indicator that forecasts future global M&A deal volumes and identifies the factors influencing conditions for dealmaking.
The Deloitte 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 significance 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. The Deloitte M&A Index has an accuracy rate of over 90% dating back to Q1 2008.
In this publication, references to Deloitte are references to Deloitte LLP, the UK member firm of DTTL.