Last week, Maegan and I returned from Dublin, where more than 150 leading international dealmakers met for a major M&A conference. All are members of IMAP, our international partnership of corporate advisors specializing in mid-market transactions. The conference, hosted by our Irish partners Key Capital, brought together senior M&A transaction advisors, corporate development officers and global investors.
The focus was Mergers and Acquisitions: The Global Outlook. The global consensus is that M&A activity will remain strong for 2015 as companies need to put cash to work with a focus on cross border deals. According to Reuters, global M&A deals topped $3.5 trillion for 2014, the highest number in nearly a decade. This is a result of larger deals in terms of volume and valuation. The US led the way with over $1.41 trillion worth of deals. North American M&A activity is up over 10% year-over-year supported by the strong economy, low interest rates and pressure on corporations to produce results in a low inflation environment. Intralinks predicts global M&A deals in 2015 will be 9-15% higher than 2014.
To better understand the magnitude of this strong global uptick in deal flow and size, we felt it would be useful to include three highly relevant articles from our IMAP partners in Germany, Switzerland and Japan:
TMT is One of the Fastest Growing Markets in the World
Many companies in different industries are looking to make their mark in the telecommunications, media and technology (TMT) sector. Most of them are partnering with companies in this field to advance the next generation of consumer service and professional models – especially for the new mega- trend, Industry 4.0. TMT is a rapidly changing market, even as one segment’s growth slows down or loses market share, other key segments attract attention with newly developed modes of social networking, digital interaction, connectivity and new devices. The continuously expanding media and IT landscape has become more and more essential. Current key trends exist in cloud computing, digital media, IT infrastructure, 3D printing, wearables and ‘The Internet of Things’. The sub-segments IT security, cloud and mobile computing, big data and IT outsourcing were the main drivers in the IT segment in 2014. In the first three quarters of 2014, the TMT industry had a total transaction volume of nearly $500 billion – this is the highest value of transactions since 2001.
TMT is the leading sector with 19.8 percent of the total value of global M&A transactions. The aggregate value for technology M&A deals worldwide in the third quarter of 2014 set a new post-dotcom bubble era record of $73.7 billion, which is up 41 percent from Q2. Among the three sub-sectors, telecommunications was still the leading sector with 89 deals valued at $236.3 billion, the highest value on record, contributing 61.6 per cent of the total of TMT in the first six months of 2014. Important drivers for the ongoing deal activity are the continuously consolidating TMT segment, followed by the high interest from foreign potential investors, divesting from non-core businesses and raising capital to expand business activities. Recent important deals include Comcast’s acquisition of Time Warner Cable, AT&T’s acquisition of DirecTV, SAP’s acquisition of Concur, Vodafone’s acquisition of Kabel Deutschland and Facebook’s acquisition of WhatsApp for $19 billion.
North America had the highest contribution at 62 percent to global TMT M&A activity. Last year was a record one for TMT M&A activities with deals worth more than $500 billion. Strategic and institutional investors feel that 2015 could be an even bigger year with growing M&A volume and an increase in deal value. We have ongoing robust (mid-market) M&A activity, with continued interest in European technology companies; especially as those in Asia recognise the value of European tech assets. The fast pace of technology change and the high number of SMEs within the sector is likely to lead to further consolidation opportunities. IMAP is a leading global M&A adviser with focus on M&A transactions in the middle market. Due to a long track record, IMAP closed globally 120 transactions in the TMT industry within the past five years. Supported by several industry experts, IMAP gained global experience and recognized several industry trends over previous years. This success factor helps IMAP to be a leading M&A advisor within this fast growing market.
Dr. Heiko Frank, Managing Director
IMAP M&A Consultants AG
IMAP Switzerland: The Pharma Industry
The Pharmaceutical industry, valued around USD 700bn, is in a prolonged period of fundamental reorganization. Deal activity is high, with more than 600 transactions with a cummulated total transaction volume of US$ 240bn in 2014, according to IMAP’s statistics. Deal activity increased in 2014 vs. 2013, partly driven by cheap financing, but also by high valuations of publicly traded companies and an accelerating pace of strategic realignment.
Three long term macro-drivers for transactions can be distinguished: First, the growing middle classes in emerging economies have created substantial new markets: China, India, Russia, Latin America and more recently Africa drive the Pharma industry’s growth by volume. Being present in these markets has become an imperative for Pharma companies with global aspirations. Particularly manufacturers of generic drugs (treatments which are not covered by patents any more) such as Sandoz (part of Novartis), Teva, Mylan and Abbot had to perform substantial acquisitions in these regions to establish their presence.
Second, the cost of healthcare expenditure has reached the sustainable maximum in mature economies. Pharmaceuticals generate around 10% of total healthcare costs, and containment of expenses for drugs has become a major topic in Europe, Japan and, more recently, the US. For one, various mechanisms have been established to ensure that generic drugs compete on price only (and not with their brands). This has led to substantial decrease of “branded generics” which were very common with medium-sized Pharma companies (in our definition, below US$ 5bn sales).On the other hand, reimbursement prices for newly developed, proprietary drugs are set relative to their medical value-added versus existing treatments. This demand, together with increasing regulatory scrutiny, have increased the average amount of R&D spent for each successful drug launch to EUR 3.5bn. This virtually prohibits that medium-sized companies can establish and maintain meaningful R&D programs.
Third, medical advances have been unlocking a plethora of new treatment opportunities, particularly in oncology and previously untreatable, rare diseases. The pace of innovation has been so fast that the large, complex organization of Big Pharma typically cannot keep up. The last decade saw the establishment of an “ecosystem” consisting of small companies driving innovation, and Big Pharma as acquirers or licensees of their products. Much of the current deal making in the Pharma industry involves large pharmaceutical companies willing to shell out substantial amounts, sometimes hundreds of millions or even billions, to acquire small, loss-making firms with a potentially lucrative drug in development. The most extreme example for such a transaction was Gilead’s acquisition of Pharmasset in 2011 for US$11.2bn, for a program which resulted in Sovaldi, the leading treatment against Hepatitis Type C, a condition with huge societal costs which previously was almost incurable.
Ireland, with its low corporate tax rate, has become a major hub for acquisitive Pharma companies. Tax inversions, i.e. moving the tax domicile away from the US in the context of an acquisition, have been a key element of many transactions in the last two years. If Ireland manages to attract more than just letter boxes, the country may supremely profit from the vast reshuffling which takes place in one of the industries with the highest value generation.
In Japan, prime minister Abe’s monetary and fiscal policies have led to a doubling of the Nikkei stock index since he took office. He is gradually acting on structural reforms (the third of his three economic policy ‘arrows’) and his party won another election last December, but the grace period for showing results in the real economy is winding down and business owners are anxious to see if the recovery can be maintained.
In March we are entering the spring wage bargaining season, which will be a test of whether Prime Minister Abe is able to generate the wage inflation which is key to his policies. Meanwhile, there are obvious concerns about long term domestic growth in a country whereby 2060 the population is expected to shrink by one third and the portion of population over 65 will rise to forty percent.
With this background, Japanese companies are making use of their large cash balances and the economic recovery to act on bold outbound M&A strategies and position for the long term. Based on deal tracking by Rec of Data, total M&A volume in Japan again increased in 2014 by 10.3 percent and outbound cross border M&A increased by 11.6 percent, forming 23.4 percent of total M&A volume.
Perhaps the best illustration of this strategic shift was spirits and beverage maker Suntory Holdings announcing 2014’s largest outbound deal, with its $16 billion acquisition of US company Beam Inc. The active nature of consumer products companies in outbound M&A was also illustrated when leading vinegar maker Mizkan surprised the market last year with its $2.15 billion acquisition of Unilever’s Ragu and Bertolli pasta sauce businesses.
Other noteworthy activity has been tie-ups between leading Japanese and non-Japan Asian players. Trading house Itochu entered into two such major transactions with a cross shareholding investment in Thailand’s Charoen Pokphand Group (CP), and then joint investment with CP Group in China’s CITIC Group. For Japanese companies with business-to-business models, they will often make cross-border acquisitions that allow them to support their Japanese clients that are expanding outside Japan as well as allow them to build channels to serve foreign businesses.
Two transactions illustrative of this theme are the acquisitions this year by transportation/delivery companies Kintetsu World Express and Japan Post announcing deals worth over $1 billion for companies based in Singapore and Australia respectively. There is talk of overly high prices being paid by Japanese companies in cross-border deals, sometime 20-30 percent more than the next highest private equity or strategic bids. However, in the recent wave of activity, Japanese companies tend to be avoiding the non-core and trophy assets that were sought in the 1980-90s which later caused problems.
For business owners globally, the strategic pressures of Japanese companies create an opportunity. If a business owner is willing to actively engage Japanese buyers and work out the benefits to both parties, then the owner may be able to optimize their business’s value in a transaction.
Jeff Smith, Managing Director, Pinnacle Inc, Japan
In closing, President Taft, who helped establish the Chamber, captured this when he said: “I am in favor of helping the prosperity of all countries because, when we are all prosperous, the trade with each becomes more valuable to the other.” What was true in President Taft’s day is even more relevant in today’s interconnected world: a strong U.S. economy and a strong global economy are critical to one another.
Kerry Dustin, Chairman, Falls River Group LLC
Falls River Group advises Drs. Foster & Smith
on the sale of their company to Petco
2015 started off with a bang for FRG. We are pleased to announce that our firm acted as the exclusive advisor to Drs. Foster and Smith, which was acquired by Petco on February 2nd, 2015. Maegan Evans (pictured) was the lead banker on the deal team which included Kerry Dustin and Erik Bindslev.
Drs. Foster and Smith is a leading veterinary-owned online pet supply company located in Rhinelander, Wisconsin. The transaction united two of the country’s largest pet specialty and online retailers, continuing a strong tradition for both companies of nurturing powerful relationships between people and their pets.
Tim May joins as Managing Director
This quarter we feature Tim May, the newest member of the FRG team. Tim joined us as a Managing Director in January.
In his new position, Tim is involved in FRG’s sell-side assignments and leads the firm’s Corporate Recovery practice. Tim has a long track record of success in leading private equity backed and privately owned companies through growth, transition, acquisition and restructuring with a consistent focus on the optimization of enterprise value and shareholder return.
Prior to joining Falls River Group, Tim was the co-founder and managing partner of a national advisory firm specializing in financial restructuring, operational turnaround, due diligence and interim management services across a broad range of industries to private equity groups, lenders/creditors and stakeholders. He has served as CEO, COO, President, Director and Advisor in companies ranging from $10MM to $500MM in revenue; and in a variety of industries including general manufacturing, healthcare, aviation, IT services, software, construction, higher education, financial services, transportation, logistics, plastics, lighting and building technology. Tim started his career with the IBM Corporation, where he held several sales and management positions.
“Tim’s skills mesh well with the FRG team” said Kerry Dustin, Chairman of Falls River Group. “Further, Tim’s strong ties to NE Ohio will complement FRG’s expanding client base in the MidWest and his experience in turnaround and restructuring will expand FRG’s
Tim earned his Bachelor of Arts in Finance and Economics from Baldwin-Wallace College in Berea, Ohio and has completed work towards his MBA in Finance at Fairleigh-Dickinson University in New Jersey.
A Key Industry Trend to Watch in 2015
The US is expected to be the primary beneficiary of lower oil prices that will act like an $80 billion stimulus to the US economy. In other countries, such as Japan, weaker currencies will offset some of the benefit of lower oil prices. India and Europe are likely to benefit. Russia and OPEC countries, particularly Iran and Venezuela, will see sharply lower government revenue and this will impact economic growth.
GE Capital Americas, Insights and Ideas
Falls River Group, LLC, a Global Merger and Acquisition advisory firm based in Naples, Florida, and a member of IMAP, an exclusive global partnership of leading M&A firms providing M&A services focused on the middle market. IMAP celebrates 40 years of successful global collaboration with consistent ranking among the top M&A advisories throughout the world. From more than 35 countries throughout North and South America, Eastern and Western Europe, the Middle East and Asia, IMAP advisers provide strategic merger, acquisition, and divestiture and related corporate finance services.
Members of Falls River Group are registered representative of and securities transactions are conducted through StillPoint Capital, LLC, Member FINRA/SIPC (www.finra.org and www.sipc.org ), Tampa, FL. StillPoint is not affiliated with Falls River Group.