Mergers & Acquisitions: 2015 Outlook and Acquisition Activity through Q2 2015.

M&A across All Industry Sectors

2015 is turning out to be another year where we speculate about the Federal Reserve’s action with interest rates and, in the meantime, abundant cash and cheap credit is fueling acquisition activity across several industry sectors. We still expect a 25 basis point rate rise announcement from the Fed this month (September), but until interest rates rise start to rise, continued low rates leave cash earning negative returns and companies are encouraged to invest money in growth initiatives and acquisitions.

The volatility and steep declines in the stock market in recent weeks would suggest otherwise, but the U.S. GDP forecast is still poised for solid growth in the second half of 2015, expected to grow 2.7% in the final two quarters, which would bring GDP growth for the full year 2015 to 2.5%. This includes the weak first quarter (bad winter weather), which was revised higher to 0.6% growth, as well as the strong rebound in the second quarter with 3.7% GDP growth, but the strength of the U.S. dollar (impacting exports) and declining investments in the oilfield continue to weigh on full year growth.

The biggest drag on the U.S. economy is weak exports (strong dollar) and concern over international demand for U.S. goods – consider China and European economy declines, in particular the impact of Greek defaults. Conversely, U.S. consumer spending is fueling growth in the U.S. economy, along with a resurgence in home building, a stronger job market and rising wages.

The Department of Labor reported 215,000 jobs were added in July and the unemployment rate stayed at 5.3%, although when combined with those who work part-time and want full-time work, the unemployment-plus-underemployment rate remains above 10% – however, this has been improving over the last twelve months. August data will be released in another week.

Despite the unrest of the past few weeks, analysts still expect an interest rate rise of 0.25% in September and long-term interest rates should end the year about 2.3%. Core inflation (excluding food and energy) is forecast to reach 2.2% this year, which remains modest and is expected to remain at a low level through the next year. The Federal Reserve is unlikely to raise rates again this year after September to avoid hurting the labor market or boosting the value of the dollar. A strong dollar continues to limit export growth, as imports remain cheaper and demand from European and Chinese economies are relatively weak.

Business spending is forecast to expand 4% this year, despite recent weakness and there are expectations for moderate increases in business spending through the rest of 2015. Durable goods orders (proxy for business investment) rose 1.4% in June and 2.2% in July.

Analysis by Sector

These 7 industries are also among the most active sectors that drive M&A Activity in Oklahoma and the Southern Midwest region:

  1. Aerospace
  2. Chemicals
  3. Construction and Engineering
  4. Energy: Oil and Gas
  5. Healthcare
  6. Industrial Manufacturing
  7. Transportation, Logistics, Distribution

1. Aerospace

M&A activity in aerospace remained robust in Q2 2015. Several deals that had been on the sidelines for some time finally came to fruition and there is strong momentum into the second half of the year. U.S. M&A transactions in aerospace led the way with 21 deals in the second quarter and 13 aerospace transactions involving private equity.  According to Aviation Week, global airline traffic is forecast to grow 35-40% over the next decade, having posted 4 straight years of airline traffic growth above 5%. As would be expected with traffic growth, Maintenance, Repair & Overhaul (MRO), Ground Support Equipment (GS) and Fixed Base Operations (FBO) continue to show modest growth forecasts. Furthermore, MRO and FBO companies have represented a quarter of aerospace deals in the last two years and approximately one third of M&A transactions in 2015. In terms of specific company activity, Landmark Aviation, Standard Aero and MB Aerospace all have private equity backing and are building platforms to pursue growth opportunities. Other active acquirers include Signature Flight Support, AAR, Wencor and Textron. M&A activity in aerospace is expected to be robust through the remainder of 2015.

2. Chemicals

The US chemical industry is set to flourish as manufacturing gains momentum, particularly in the chemical-intensive sectors such as automotive, aerospace, rubber and printing. Abundant natural gas supplies and continuing low oil prices are making investments attractive in the chemical industry, however, the stronger dollar continues to hurt US chemical exports. Recovery in the building products and housing markets is expected to spur growth in the chemical industry.

The second quarter saw strong growth in volume; but deal value declined substantially. This was the lowest quarterly average deal value since Q3 2013. While more deals were announced, there has been a trend of companies pursuing smaller deals that strengthen their existing portfolio of assets. The high-value specialty chemical segment remained attractive to investors, accounting for more than half of the quarter’s value. Also, financial investor activity once again advanced as a proportion of deal volume in the second quarter of 2015.

Chemical companies are focusing on optimizing their portfolios to create more value for shareholders and to generate higher margins, making bolt-on and other acquisitions an attractive means of increasing geographic reach, market share, and new markets. Most strategic buyers see acquisitions as their best opportunities to achieve these goals. In addition, private equity exits are on the rise, accounting for more than 25% of this quarter’s activity.

3. Construction and Engineering

M&A activity in construction and engineering accelerated sharply in the second quarter of 2015 with substantial increases relative to the prior quarter in both volume and value of transactions. US non-residential construction markets continue to grow at a steady pace and indicators on housing starts and building permits show improving fortunes for residential builders. Frail real estate markets are putting downward pressure on the construction segment, along with a continued drop in building products output.

Business restructuring and strategic alignment were among the primary drivers of M&A in the last quarter, though investor groups also had a major role. Companies looked to simplify their businesses, focus on core operations and shed non-strategic units. Local activity dominated, particularly in recovering markets where strategic buyers see opportunities to gain scale.

Depressed oil prices have been a mixed blessing, supporting real income growth and an improvement in consumer confidence in many regions, but commodity price volatility suppresses energy construction and deal activity. Going forward low oil prices and expansionary monetary policies should support modest expansion, even though a lack of funding for public infrastructure remains a key risk. Pockets of construction directly tied to upstream energy projects are similarly in danger of defunding, while downstream projects remain on track. Deal activity seems likely to continue at an upward pace. Investor groups have become increasingly active in construction and building material companies, particularly in recovering regions.

Note: ClearRidge’s transaction experience in engineering focuses on industrial, energy and telecommunications.

4. Energy: Oil and Gas

Industries tied to energy prices continue to see some purging and M&A activity has declined since the beginning of the year with many stronger companies bargain hunting for the rest of 2015. We commented several months ago that businesses along the oil and gas supply chain would likely have a difficult outlook for 2015 and possibly 2016. With varying degrees and depending on their exposure to upstream energy activity, 2015 may continue to be a year to reduce expenses and sit on the sidelines, waiting for some bargain hunting acquisition activity.

Depressed energy prices continue to attract attention from financial investors, who are showing an increased interest in the oil and gas industry, with cash on hand and experienced management teams in place. There are expectations for more private equity commitments and deals in the second half of 2015. Interest in the Midstream sector drove second quarter deal volume and value as corporate buyers pursued gathering and transportation operations. In the US, onshore production continued to increase despite the low oil and gas price environment. Moving forward, activity looks to continue as businesses realign their strategies to the current oil price realities.

Total deal activity in the upstream segment continued to drop in the second quarter. Additionally, the total number and value of oilfield services, downstream and upstream deals decreased as well. Buyers in the oil and gas industry continue to be opportunistic in shale formations as investors focus on specific resources to further enhance their positions. The M&A outlook for oil and gas looks good for the medium and long-term if buyers can see beyond the short-term volatility.

5. Healthcare

Healthcare M&A continues at a heightened pace as companies in all subsets of the industry are contending with shifts that are creating both challenges and growth opportunities. Increased M&A has been promising, buy many acquirers now turn their attention to a disciplined debt pay-down and growing EBITDA.

Competition for attractive healthcare assets has increased in this active acquisition environment, causing companies to pay up on deals. Despite the increase in debt levels, financial flexibility has not been significantly compromised, since most recent transactions have been EBITDA accretive.

Private Equity continues its strong focus on healthcare, with 450 different private equity groups acquiring at least one healthcare company since 2012. In the last year, there were 334 private equity healthcare transactions, a 27% increase over the previous year and a record for the past decade. A high focus area has been clinics and outpatient services. Almost half of all the healthcare M&A investments by private equity have been add-on acquisitions as private equity groups continue to build and consolidate.

6. Industrial Manufacturing

M&A activity maintained a strong pace in Q2 2015 despite lackluster transaction volume in the United States. Strategic activity this quarter covered a diverse range of end markets. Companies are cautious about growth, keeping an eye on economies of scale and operating efficiencies in core businesses. Financial investors continue to pursue high quality industrial assets with stable growth prospects, particularly in recovering markets.

There has been a heightened level of activity from the activist investor community, and their effect on M&A activity and strategic decisions across the industrial products sector. Niche areas of focus have included advances in automation, efficiency, and machine communication, as well as next generation robotics and nanotechnology.

The biggest challenge for potential buyers is weighing up long-term growth trends (emerging markets and resource scarcity megatrends) with short-term volatility. Companies are reevaluating growth opportunities in major markets as they digest both direct and indirect implications of the deterioration in oil prices and consider the potential impact of the first round of regulatory tightening on US economic activity.

7. Transportation, Logistics, Distribution

Deal activity in transportation, logistics and distribution this quarter increased in both volume and value. Q2 2015 activity was driven by trucking and logistics companies, which when combined, accounted for more than half of the quarter’s overall deal volume. An increase in trucking deals drove 28% of the second quarter’s volume, compared to only 22% in the first quarter. Historically, the trucking industry has been a significant driver of deal activity (due in part to the highly fragmented industry), as larger companies acquire smaller ones in order to achieve increased market share, increase capacity and share synergies. Recent lower fuel costs have made acquisitions more attractive and boosted valuations, at least in the short term.

ClearRidge Perspective for 2015

ClearRidge deal opportunities continue to gain good visibility from industry strategic buyers and private equity groups, with the individual deal dynamics being the greatest determinant whether the buyer is a strategic, private equity or a blend of the two (strategic owned by private equity).

Pre-emptive company analysis and due diligence continues to be critical. Bolstering our standard business practice at ClearRidge, our team is working hard to remove obstacles to close a transaction and sell a client’s company by ensuring that only the most likely buyers with the capital and commitment to close a transaction make it to the closing table.

The most active buyers are demanding increasingly thorough and professionally prepared information, earlier in their review of each acquisition opportunity, including deep level transactional and financial analysis.  Companies that are better prepared prior to the sale process have been rewarded with higher valuations, smoother and less intrusive pre-closing due diligence, and a quicker cycle to closing the transaction and getting paid.

How Can ClearRidge Help You Sell Your Business?

ClearRidge was founded in 2008 to assist business owners make better strategic decisions; to provide the owners of midsized private companies with an outsourced team of industry-leading professionals. Leveraging decades of experience successfully completing complex transactions, ClearRidge clients benefit from discrete, professional and effective representation in the sale of their private company, acquisition, restructuring or capital sourcing.

ClearRidge is a team of best-in-class, multidisciplinary professionals. ClearRidge advisory services are provided with a focus to maximize value for shareholders and ensure that the process is confidential, timely and professional.  ClearRidge is among the most active investment banking firms in our region and has a diverse track record of success. For further information on our team, industry expertise and transactions history, please visit

Sources: This report has been compiled from reports and research including federal data, independent analysis, Kiplinger, PricewaterhouseCoopers, Janes, Deloitte and other sources cited in the text.

Note: Unless otherwise stated, all deal data is for the United States only. In the report, you will see that some of the deal data is for larger public companies. The most reliable and timely data tends to be for the larger companies in each industry; however, deal activity of largest corporations is also a good barometer for M&A activity among midsized companies in the same industry.