August 20, 2010 | Posted by steve.yoost@alston.com | Topic(s): Market Outlook
The PricewaterhouseCoopers Transaction Services practice recently released a study showing M&A activity remained at sluggish levels during the first half of 2010, despite improvements in credit and equity markets. According to the report, the number of closed deals in the U.S. was 3% lower than in the same period of 2009, which represents the lowest deal volume this decade. The study predicts, however, that activity for the second half of 2010 will be more robust, at least for middle market deals. PWC expects several trends, including (1) private equity players will remain active in buying distressed assets, (2) declining values of the euro and the pound will make cross-border deals more attractive for U.S. buyers, and (3) corporations will have “unprecedented cash levels” on their balance sheets that can be deployed in acquisitions. PWC also predicts that looming tax increases may prompt an increased level of divestitures designed to close before year end.
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Preqin Ltd. recently reported 70 secondary transactions through June 30, 2010, valued at $18.5 billion, which is over three times the $6 billion total for 59 reported transactions in 2009. In Q1 of 2010, 24 secondary buyouts were reported, representing $7 billion in value. Secondary buyout activity includes both transactions involving secondary sales of private equity funds and transactions involving the change of ownership of a company among private equity groups. A recent example of secondary buyouts includes AXA Private Equity’s recent purchase of $1.9 billion in equity funds from Bank of America in April, 2010. Other examples include TPG’s scheduled purchase of insurance software provider Vertafore Inc. from Hellman & Friedman and JMI Equity for $1.4 billion, and Goldman Sachs Group Inc.’s acquisition of refrigerated foods company Michael Foods from Thomas H. Lee Partners for $1.7 billion. Following suit, in an estimated $3.1 billion buyout, private equity firms BC Partners and Silver Lake Partners have recently announced plans to purchase MultiPlan Inc., a health care company that is one of the largest U.S. independent preferred provider organizations, from Carlyle Group in the year’s largest secondary buyout to date.
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During the 6th annual Aspen Ideas Festival held July 5-11, 2010, David Rubenstein, Co-Founder and Managing Director of The Carlyle Group, spoke in a CNBC interview about the current global private equity investment climate. According to Mr. Rubenstein, deal opportunities are not as robust in the U.S. and Western Europe compared to “large” emerging markets such as China, India and Brazil. He expects that by 2035 China and India will have, respectively, the world’s two largest economies. Because China is shifting from an export economy to a consumer economy, The Carlyle Group has invested in several Chinese consumer companies, including a fisheries company and a milk company.
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In recent weeks, Standard & Poor's Market, Credit, and Risk Strategies (MCRS) group released its findings regarding the likelihood of U.S. companies engaging in mergers and acquisitions in Europe while also identifying possible targets.
MCRS created a list of potential targets based on an analysis of certain characteristics of recent M&A transactions in Europe in the past twelve months involving U.S. acquirers.
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According to a recent survey of 440 senior executives around the world, M&A activity is expected to increase in the next two years while major fundraising initiatives largely remain on hold. The survey showed that “respondents see M&A activity as the area where an increase in transaction volumes is most likely (49%), compared to 12 months ago, followed by an increase in IPOs (31%).” However, only 38% of corporate respondents stated that they expect to raise fresh capital in the next two years. Due to the anticipated lack of fundraising activity in coming years, competition for capital is expected to remain high and the trend of corporations hoarding cash reserves, for investment or as an eventual return to investors, may increase. In response to the survey results, Doug Guzman, Head of Global Investment Banking at RBC Capital Markets, stated that “the ability for corporations to part-fund their own transactions through cash reserves will be extremely attractive to banks, who are increasingly looking to reduce their exposure to risk.”
More information about the results of the survey, which was conducted by the Economist Intelligence Unit and commissioned by RBC Capital Markets, may be found here.
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Ernst & Young’s Capital Confidence Barometer reported encouraging developments based on the accounting firm’s ongoing study that measures corporate confidence in the global market. After surveying more than 800 executives from over 50 countries across more than 40 industries, E&Y reported that the majority of respondents predict the economic downturn will end in their industry within 12 months, with the highest level of confidence noted in the automotive industry. This is a vast improvement over the results of E&Y’s 2009 survey, and the optimism is fueled by the fact that almost half of the companies are expecting to make an acquisition in the next six months. Cash remains the single largest means of funding acquisitions, while the use of debt as a source of funding continues to decline.
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The financial services industry experienced one of its slowest M&A markets in 2009, and strategic buyers dominated what little activity there was by taking advantage of distressed deals (mainly acquisitions of assets from FDIC receiverships and distressed loan portfolios) to gain market share, expand their geographic footprint,to build their portfolios and acquire strategic assets.
As the economy improves, there are reasons to be optimistic about M&A activity in the financial services sector. A recent report issued by PricewaterhouseCoopers (“PWC”) predicts an improved M&A market in 2010 with a more balanced mix of distressed and non-distressed deals and strategic and financial buyers.
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On March 28, 2010, Zhejiang Geely Holding Group Company Limited entered into a stock purchase agreement with Ford Motor Company to acquire 100% of the outstanding shares of Volvo Car Corporation for $1.8 billion, with approximately $1.6 billion of that amount to be paid in cash. The sale is expected to close in the third quarter of 2010 subject to regulatory approval. The deal has not been without naysayers, particularly with respect to the fate of Volvo in the hands of a newcomer to the automotive sector best known for low-end vehicles.
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