According to new study from EY, the dynamics that made 2014 a record year for US dealmaking will continue into the new year, pointing to ongoing buoyancy for the M&A market in 2015. US deal volume rose 5.1% in 2014, with 10,889 deals compared to 10,360 in 2013. Meanwhile, value soared to $1.6 trillion in 2014, up 40.7% from $1.1 trillion in 2013. This trend is likely to stay on course with 81% of executives expect the deal market to improve in the next 12 months, while 41% of US companies have five or more deals in their pipeline versus just 8% of companies six months ago.
US deal value was affected by a surge in high-profile megadeals. In 2014, 228 deals were worth between $1 billion and $10 billion, up 37.3% from 166 deals in 2013. Additionally, 21 deals were valued at $10 billion or more in 2014, up 75.0% from 12 such megadeals in 2013. On a global level, the United States was involved in nine of the 10 largest deals in 2014. Moreover, the US was the most targeted country in 2014, with 1,210 inbound deals worth $234.8 billion.
“2014 saw the US deal market get back to where it was headed prior to the sustained 2008 financial crisis,” said Rich Jeanneret, EY Americas Vice Chair, Transaction Advisory Services. “Based upon continued confidence and strong dynamics which include low interest rates, an improving economy, and robust corporate earnings, we expect deal growth to stay strong in 2015 and to draw out the middle market. Set against the global backdrop of post-crisis rebalancing and a divergence in performance across countries and industries, the US has proven to be ahead of the curve.”
Shareholder activism has had, and will continue to have, a significant impact on M&A. “More than ever, shareholder activists are keeping management on their toes,” said Mr. Jeanneret. “This fosters an environment where assets, brand and strategic vision are in a state of constant assessment. This environment bodes well not only for deal volume but also transaction type, and we expect to see greater levels of spinoffs, splits and carveouts over the next year.”
Spins, splits and carveouts pave the way for the next wave of M&A
Divestitures are in the spotlight, as companies undo past mergers and growth strategies that no longer fit with their core businesses. “Companies are trying to free up capital and are asking whether the sum of the parts is greater than the whole,” said Mr. Jeanneret. “Executives know that divesting as a strategic alternative is just as important to creating value as other transactions. This wave of spinoffs and splits will inevitably lead to additional M&A, predominantly in the middle market, as the spun-off businesses seek to bulk up or become acquisition targets themselves.”
Private equity’s pipeline: IPO’s at the forefront
Private equity exits, and IPOs in particular, took center stage this year, bringing the industry back into equilibrium. There were 409 US M&A exits in 2014, up 36.7% from 299 in 2013. Value spiked 50.7% to $154.7 billion in 2014 versus $102.6 billion in 2013. Meanwhile, 2014 saw 90 US IPOs of PE-backed companies, essentially flat from 2013, when 92 deals debuted. Value, however, nearly doubled, up 96.0% to $59.2 billion in 2014 from $30.2 billion in 20137. With the IPO pipeline robust, and assuming stock exchanges remain receptive, 2015 should exhibit a similar trend line.
Additionally, 2014 saw 772 PE acquisitions, up 6.3% from 726 in 2013. While volume increased, PE acquisition value dropped 21.0% to $100.7 billion this year, down from $127.5 billion in 2013. Average 2014 deal size was $381 million.
In terms of fundraising, 335 funds were raised in 2014, up from 323 funds in 2013. Fundraising value reached $247.8 billion in 2014, up 8.4% from $228.7 billion in 20138. Large funds accounted for 72% of fundraising this year. An increased level of dry powder, coupled with a continued accommodative financing environment, should translate into an increased level of buyouts in 2015.
Private equity investing activity has been relatively consistent across a number of industries, with highly visible activity in technology, energy and financial services. Over the past 10 years PE has graduated from a generalist model to a sector approach, focused on specific subsectors. North American funds are currently sitting on $260.2 billion of dry powder.
Private equity firms will target carve outs next year and will want a seat at the table as corporates decide whether to sell or spin. The challenge for PE firms will be finding deal opportunities and putting money to work as they face competition from their peers, as well as an increasing number of corporates coming into the market with conviction.
“Private equity is firing on all cylinders,” Mr. Bunder added. “Fundraising, investing, and exits have been robust in 2014, and in 2015 we expect these trends to continue. While the United States and Europe are attractive investment destinations for PE, the emerging markets remain a focus, and we expect to see an increase in invested capital in these markets as well as frontier geographies.”
“The environment is extremely conducive to dealmaking, and we expect the US M&A market to continue to be active in 2015,” Mr. Jeanneret concluded. “However, despite high transaction volumes and values, the current wave of M&A shows much more disciplined and rigorous analysis of deal opportunities than we have seen in past deal frenzies. Next year, big corporate deals will not disappear, but they will also open the door for a follow-on rush of smaller, middle-market transactions.”
2014 PEPD • Private Equity’s Leading News Magazine • 12-9-14