Studies

The global industrial products (IP) industry experienced an increase in the number of mega deals (value of $1 billion or more) in the first quarter of 2012, despite an overall decrease in the volume of deals (valued at $50 million or more) compared to the fourth quarter of 2011, according to a series of quarterly merger & acquisition reports by PwC that examined activity in the first quarter of 2012 across six sectors: aerospace & defense (A&D), chemicals, engineering & construction, industrial manufacturing, metals and transportation & logistics.  Despite improved balance sheets and liquidity across several sectors, the constrained outlook and continued uncertainty regarding the world economy continued to dampen overall M&A activity.

Strategic investors continued to lead activity across the IP industry, but financial investors increased their activity levels in the first quarter of 2012.  Across all IP sectors, 26.2 percent of deals that were worth more than $50 million involved financial investors in the first quarter, a slight increase from 23.1 percent of such deals in the fourth quarter of 2011.  “While the increased participation of financial investors represents a healthy sign for potential valuation appreciation, we believe strategic investors will continue to drive transaction volume given lack of economic visibility,” said Bob McCutcheon, U.S. industrial products industry leader at PwC.

The total number of mega deals across the combined six sectors increased to 22 during the first quarter of 2012, almost double the 12 mega deals completed in the fourth quarter of 2011.  This led to an increase in total deal value among deals worth more than $50 million during the first quarter of 2012 to $80.8 billion, as compared to just under $59.5 billion in the previous quarter.   The increase in total value occurred even though the overall volume of deals exceeding $50 million decreased to 153 in the first quarter, from 168 in the fourth quarter of 2011.

Deal value and mega deal activity increased in the industrial manufacturing, metals and transportation and logistics sectors.  For deals worth more than $50 million, deal value in the industrial manufacturing sector surged to $15.7 billion in the first quarter, from $11.3 billion in the previous quarter. In the metals industry, the total value of deals (worth more than $50 million) increased to $18 billion in the first quarter, from $15 billion in the fourth quarter of 2011.  In addition, deal value worth more than $50 million in the transportation and logistics segment rose to $22.6 billion in the first quarter, from $13.6 billion in the previous quarter.  In all three sectors, the number of deals worth more than $50 million decreased sequentially, highlighting the role of mega deal activity in driving total value.

“Overall M&A activity moderated during the first quarter given persistent uncertainty regarding the global economy and an ongoing emphasis to maximize profitability and conserve cash,” said Mr. McCutcheon.  “Issues such as concerns over the sovereign debt crisis in Europe and the breadth of the U.S. recovery continue to weigh on the market.  On a positive note, total transaction value grew sequentially during the quarter given the resurgence of mega deals across multiple sectors.  Bolstered by strong balance sheets and attractive valuations among targets, the uptick in larger transactions was primarily driven by strategic investors who tapped into their cash resources to pursue selective opportunities.  Looking ahead, companies that are benefiting from privatization and the infrastructure build-out in emerging markets remain appealing targets, particularly in Latin America and Asia.  Given the ongoing focus to expand globally, as well as ample liquidity, we expect strategic players to continue to pursue a prudent approach to M&A in the year ahead.”

According to PwC’s reports, the Asia and Oceana region remained the most active for deals during the first quarter of 2011, accounting for 46 percent of the total number of deals exceeding $50 million or more across all sectors.  This included deals where at least one party was from the region.  Europe and North America were the second and third most active regions.

“The industrial manufacturing sector represented a bright spot for M&A activity among U.S. companies during the first quarter,” Mr. McCutcheon added.  “Reversing the recent trend, the U.S. was the most active country in terms of both the volume and value of industrial manufacturing deals during the quarter.  The upswing reflects the overall strength and improved outlook for the U.S. economy, in line with the increased sentiment recorded in PwC’s first quarter Barometer report.   Notwithstanding prevailing caution, we expect M&A activity across the U.S. industrial manufacturing sector to remain healthy in the coming months, supported by an improving business climate and ample cash among industry leaders.”

Despite the needs to expand globally to secure new growth opportunities, the pace of local deals continued to represent the majority of transactions during the first quarter, reflecting the cautious outlook.  The pace of local deals worth more than $50 million increased to 66.7 percent of deals in the first quarter of 2012 compared to 65.7 percent of deals in the fourth quarter of 2011.  At the same time, cross-border deals (worth more than $50 million) decreased slightly to 33.3 percent in the first quarter.

A breakdown of PwC’s analysis of M&A activity and outlook for IP follows:

Aerospace & Defense – After a robust 2011, the A&D sector experienced a decline in deal activity in the first quarter.  Cybersecurity, unmanned systems and other defense areas accounted for multiple transactions, and U.S. entities continued to drive larger deals, while non-U.S. companies drove a greater share of smaller and undisclosed deals.  Foreign A&D demand is attracting new sector constituents in emerging markets and consequently transactions, particularly at the smaller end of the deal value spectrum.  Deal activity in the sector should increase throughout 2012.  Commercial OEMs will likely remain active due to ample cash positions driven by the record level of aircraft orders.  In addition, as aerospace production increases, vertical integration among suppliers may become necessary to ensure that production targets can be met.  Investor pressures to divest slower-growth defense businesses are likely to lead to more spin-offs in 2012 as well.

May 4, 2012 – The Private Equity Growth Capital Council’s Private Equity Index (PE Index) fell to 87.1 during the first three months of 2012.  The computation, which measures overall private equity activity in the U.S., fell 16 percent from the previous quarter.  The quarterly change in the index’s value is driven primarily by sharp declines in private equity deal volume during the quarter.  For the first time since 2010, the U.S.-based index fell below its 10-year moving average but still above index levels in late 2008 and early 2009.

“The current value of the PEGCC Private Equity Index reflects large reductions in deal volume and smaller declines in fundraising and investment exits,” said Bronwyn Bailey, PEGCC Vice President of Research.  “The movement in the index is unsurprising, given the low deal volumes observed during the first three months of the year.  Coming off a strong fourth quarter, we don’t expect that lessened activity in the first three months signals a longer trend. Indications are that deal volumes will pick up to their normal pace through the first half of the year, despite continued difficulty in accessing credit,” Ms. Bailey concluded.

Key findings about private equity activity in the first quarter of 2012 include:

• Average equity contribution by sponsors of U.S. leveraged buyouts increased to 44 percent in 2012-Q1, surpassing the 2011 level of 38 percent.

• U.S. private equity investment deal volume fell from $42 billion in 2011-Q4 to $13 billion in 2012-Q1.

• U.S. private equity fundraising volume declined by 17 percent from the previous quarter to $20 billion.

• U.S. private equity exit volume fell by 22% from the previous quarter to $24 billion.

Automotive mergers and acquisitions activity was strong in the first half of 2011 and then tapered off in the second half of the year following Europe’s sovereign debt crisis and the natural disasters in Japan and Thailand, according to a new PwC publication Automotive M&A Insights: Driving Value. In 2011, 594 automotive deals were completed with a disclosed value of $45 billion, reflecting an increase compared to 2010, which had 520 completed deals totaling a disclosed value of $25 billion.

“The auto industry is primed for growth in M&A in the next few years,” said Paul Elie, U.S. automotive transaction services leader. “Since the second half of 2011, dealmakers have approached the market with increased conservatism given the looming economic challenges in the EU and uncertainty in the regulatory environment. As soon as the macroeconomic environment improves, we will likely see a wave of pent-up demand resulting in increased deal activity.”

Highlights from the PwC report includes:

Automotive vehicle manufacturers, suppliers and others
• M&A deal volume among vehicle manufacturers declined 5 percent with 86 deals closing in 2011, compared to 91 deals in 2010. Disclosed deal value in the vehicle manufacturing segment increased slightly over 2010 to $15 billion in 2011, from $12 billion in 2010.

• M&A deal activity among component suppliers increased 9 percent to 303 deals closed compared to 278 in 2010. Disclosed deal value in the supplier segment grew to $10 billion compared to $4 billion in 2010.

• Other automotive segments such as retail, aftermarket, rental/leasing and wholesalers realized a significant growth of 36 percent totaling 205 deals in 2011, compared to 151 deals in 2010. Disclosed deal value significantly increased by 131 percent totaling $19 billion in 2011, compared to $8 billion in 2010.

Financial and trade buyers
• Financial and trade buyer’s M&A mirrored the overall automotive deal market in 2011, increasing in the first half of the year and slowing the second half of the year.

• Trade buyers accounted for 434 deals in 2011 versus 379 in 2010. The disclosed deal value totaled $31 billion, which was an increase compared to $15 billion in 2010.

• Financial buyers accounted for 160 deals totaling $14 billion in 2011, compared to 141 deals totaling $10 billion in 2010.

Additionally, the report found that increasing competition from foreign companies is driving locals to pursue M&A deals as a strategic alternative to developing in-house technology. Key technologies in propulsion, safety, advanced electronics, and materials will likely experience the greatest interest among emerging Asian players.

“Strategic buyers are looking at M&A as an opportunity to grow globally,” said Mr. Elie. “As soon as there is more confidence in the market, we will likely see an increase in deals aimed at acquiring talent, technology capabilities, and market access as strategic buyers position their businesses for long-term success.”

Looking ahead, global automotive deal activity is positioned for growth in the next few years. This is largely attributable to a rise in fiscally sound strategic buyers with significant cash reserves and private equity buyers with large amounts of uninvested capital and a need for investment exit strategies. Equally important is the growth in light vehicle output, which is expected to reach 79.7 million units in 2012 and 86.2 million units in 2013, according to PwC’s Autofacts.

The Deloitte Consumer Spending Index climbed higher in March, marking only the third monthly increase over the past 12 months. The Index tracks consumer cash flow as an indicator of future consumer spending. “The Index turned upward as the pace of declining new home prices slowed,” said Carl Steidtmann, Deloitte’s chief economist and author of the monthly Index. “Despite this improved performance, there is little evidence the housing market is picking up. On the positive side, initial unemployment claims continue to move lower from a year ago.”

According to Deloitte’s analysis, recent developments that indicate consumer cash flow may be strained despite the recent steady increase in real consumer spending include:

• Real incomes fell 0.1 percent in February even as consumer spending rose, and are up just 0.3 percent from a year ago. Quantitative easing is adding to the downward pressure on incomes as income from interest fell in February for the eighth consecutive month and is down 3.1 percent from a year ago, not adjusting for inflation.

• The savings rate has fallen from 4.7 percent to 3.7 percent over the past two months, adding roughly $110 billion to consumer spending. Without that decline, instead of rising by 0.7 percent, spending would have fallen. Real consumer spending is up 1.8 percent from a year ago.

• Gasoline prices continue to rise. The average price of gasoline rose 4 cents last week to $3.97 a gallon up $0.68 since mid-December.

The Index, which comprises four components — tax burden, initial unemployment claims, real wages and real home prices — rose to 1.80 from an upwardly revised reading of 1.52 the previous month.

“The warmer weather is helping consumers shake off the winter doldrums, but they remain vigilant about their pocketbooks, particularly in the face of rising gas prices this spring,” said Alison Paul, vice chairman, Deloitte LLP and retail & distribution sector leader. “In our third annual spring survey of U.S. households, consumers told us they are feeling slightly better about the economy and their finances compared to a year ago. While 67 percent indicate they plan to spend the same or more this year, nearly 80 percent say higher prices could cause them to change their spending in the months ahead. We also found that consumers’ use of mobile and online continues to grow across the board. This suggests that digital channels should be one of retailers’ strongest competitive plays to capture the consumer, particularly those shoppers keeping an eye on their household budgets.”

Highlights of the index include:

Tax burden: The tax burden continues to rise slowly even as tax revenues collected by the Federal government stagnate. Much of the increase is coming at the state and local level where tax increases have been needed to meet balanced budget requirements. The tax rate is up 10.15 percent from a year ago.

Initial unemployment claims: Claims continue to move lower from a year ago, and were at 354,750 in the most recent month. Falling jobless claims are one of the bright lights in an otherwise darkening outlook for consumer finances.

Real wages: With energy prices rising, real wages continue to fall, and are down 1.2 percent from a year ago.

Real home prices: Prices fell slightly in the most recent month, dropping 1.2 percent from a year ago, which is less than last month’s decrease of more than 12 percent. A slowdown in the pace of real home prices is a positive as it becomes less of a drag on the Index.

According to PwC, the US IPO market showed significant strength in the first quarter of 2012, resulting in the highest first quarter volume since 2007. The U.S. IPO market continues to attract a diverse range of companies across different industries, according to PwC. The technology, industrial and financial services sectors were the most active during the first quarter, contributing thirteen, nine and nine IPOs, respectively. In terms of value, industrial companies led with $2.1 billion, representing 36 percent of total capital raised in the first quarter of 2012.

Thirty-six of the 44 IPOs in the first quarter of 2012 were backed by financial sponsors which accounted for $4.8 billion of total quarterly proceeds. Financial sponsor-backed companies represented 82 percent of the total volume and 83 percent of the total value of IPO activity in the first quarter. This is in line with the first quarter of 2011 when financial sponsor-backed IPOs represented 70 percent of the total volume and 86 percent of the total value.

“Financial sponsors continue to play a major role in IPO market activity, as they seek to fully monetize key portfolio investments in an improving climate for the capital markets, particularly in the technology sector where all the technology IPOs in this quarter were backed by financial sponsors,” said Henri Leveque, leader of PwC’s U.S. Capital Markets and Accounting Advisory Services. “As the year unfolds, we expect the IPO pipeline to continue to reflect a high proportion of financial sponsored companies as private equity and venture capital firms seek to raise capital, build liquidity and pursue new acquisition opportunities globally.”

Average post-IPO returns for offerings that priced from January 1, 2011 to March 31, 2012, entered into positive territory, ending the first quarter up an average of 13 percent from IPO price, reversing losses at the end of 2011. This positive reception by the investor marketplace demonstrates improved optimism about new issuers with sound fundamentals and a solid growth plan, according to IPO Watch, a quarterly and annual survey of IPOs listed on U.S. stock exchanges by PwC’s Transaction Services practice.

The current IPO pipeline (companies that have filed for an IPO in the last twelve months but not yet priced) remains high at 157 companies, representing a slight decline of 8 percent from year end 2011. The IPO pipeline is led by three industries contributing 60 percent of total pipeline volume, which includes the technology (24 percent), industrial (18 percent) and financial services (18 percent) sectors.

“Continuing on the increase in IPO activity in the fourth quarter, we saw strong first quarter IPO volume and filing activity, which coupled with the increased investor interest in IPOs, bodes well for the year ahead,” said Mr. Leveque. “The IPO pipeline remains healthy with a diverse range of companies exploring public launches, with notable strength in the technology, industrial and financial services sectors. Major IPO activity from some of the larger well-known technology players, including Facebook, will likely lend support to a host of smaller technology companies looking to enter the public markets.”