ClearRidge Report: Mergers & Acquisitions for Q2 2014 and Outlook through 2014
We are in the third quarter of 2014 and data is now available for deal activity through the second quarter of 2014. In this report, we will review ClearRidge’s most active industry sectors and provide an outlook through Fall 2014. These 8 industries are also among the most active sectors that drive M&A Activity in Oklahoma and the Southern Midwest region:
i. Aerospace & Defense
ii. Aircraft Parts, Maintenance, Repair and Overhaul
iv. Construction & Engineering
v. Energy: Oil & Gas
vii. Industrial Manufacturing
viii. Transportation, Logistics, Distribution
Note: 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.
I. Aerospace & Defense
Q2 2014 continued the good start to the year that Q1 began. There were 70 deals announced in this quarter, which is up from the 59 deals announced in Q1 2014. The vast majority of deals came from Aerospace, as the deal flow within the defense segment is anemic at best.
Improved deal value and flow within the Aerospace segment can be attributed to high growth—estimated by IBIS World to continue at an annualized clip of 3.8% through 2018. Aerospace defense companies believe that increased passenger travel may prompt major airlines to update their fleets. This realization has contributed to a transfer of ownership from Private-equity group (PEG) companies to strategic owners over the past three quarters. Expect the trend of scaling-up operations to continue.
Defense continues to be an industry that as a whole is in moderate decline, despite bi-partisan cooperation in Washington. Companies are reluctant to expand operations while demand from their biggest customer, the U.S. government, remains tepid. The U.S. Department of Defense recently reaffirmed their anti-trust policy against consolidation among large players—hoping to control costs and the supply chain for the sake of national defense. This policy creates opportunities for smaller players within the industry and may define the future of American defense contracting going forward.
II. Aircraft Parts, Maintenance, Repair and Overhaul
2012 and 2013 were tough years for MRO companies. MRO is an industry dominated by the ten or so largest companies, but despite their large stature, many of these large companies are far less profitable than their micro competitors. Like most of the aviation industry, MRO will be carried along with the swift currents of air travel in coming years. The projected 5% annual growth rate in air travel, and projected growth in the industry at large will aid the operations of MRO companies going forward. This growing level of demand for passenger travel coupled with global inability to produce aircraft quickly enough to satiate increased demand should mean improved prospects for MRO in the future.
Deal activity continued to decline in the second quarter of 2014. Unsurprisingly, mega-deals dominated the chemicals in Q2 2014, as almost half of the value of all deals for this quarter came from four mega-deals. PWC forecasts that although there has been a moderate 11.1 percent decline, 2014 deal activity should still exceed the activity of 2013.
IV. Construction & Engineering
Construction and engineering experienced growth in Q2 2014, also boosting M&A activity. Several mega-deals occurred, lifting average deal value, despite lower volume than in previous quarters. Performance of the housing industry remains steady, but growth is still uncertain. According to the Census Bureau, housing starts in March were at a seasonally adjusted annual rate of 893,000. This is 9.3 percent below May’s 985,000, but is still 7.5 percent above the June 2013 rate of 831,000.
Perennial weakness in housing has led many construction and engineering companies to refocus and make investments in non-traditional avenues.
Note: ClearRidge’s transaction experience in engineering focuses on industrial, energy and telecommunications applications.
V. Energy: Oil & Gas
Overall activity in oil & gas:
The American interior continues to provide shale opportunities. While North Dakota’s Bakken and Texas’ Permian oil plays are the examples often quoted when discussing fracking, there are opportunities throughout the central U.S., Northeast, and the Gulf of Mexico. These opportunities continue to fuel GDP growth and create lucrative business opportunities.
Despite the plethora of opportunities created by fracking, M&A activity is sporadic. From one quarter to the next, it is not unusual to see significant fluctuations in merger activity. This does not necessarily reflect the health of the sector, but instead tells a story of deal opportunities, availability of capital and resources for investment. The oil and gas industry experienced an erosion in profit margins last year as many producers entered a capital spending phase with high operation and development costs. A KPMG study polled industry executives and 56% of them said they plan to initiate a merger this year while 39% expect to initiate a divestiture. This could bid acquisition prices to higher levels.
In Q2 there were 54 deals, which was a 15% increase over Q1 2014. Q2 has been the strongest second quarter in five years.
Upstream, Midstream, Downstream
Upstream accounted for 61% of deal activity for 51% of all Q2 deal value across 33 transactions. 10 Midstream deals in Q2. 7 Downstream deals in Q2.
There have been 90 deals in oilfield services so far in 2014 and activity continues to grow in this area. One reason for this growth is increasing oil and gas development in the U.S. The outlook for the remaining part of 2014 is strong and deal acitvity should continue.
Note: Within oil and gas, ClearRidge’s transaction experience is mostly in oilfield services, manufacturing and related industries.
In Q2 2014, deal volume increased, including an announcement by Bayer to acquire a branch of US-based Merck. Obamacare’s implementation has three main effects on M&A activity in healthcare: economies of scale, measuring health outcomes, and the rise of consumerism. Due to the need to measure health outcomes, medical companies are purchasing additional divisions concerned with outpatient monitoring. Some of these units include pre-admit, post-discharge, home healthcare, and long-term care.
VII. Industrial Manufacturing
Economic activity in the manufacturing sector continued to expand throughout Q2 2014, with a 104% increase over Q1 2014.
Economic activity in the manufacturing sector expanded in March and, according to the nation’s supply executives in the latest ISM Manufacturing Report; the overall economy grew for the 58th consecutive month. The ISM’s July 2014 PMI number of 57.1 percent, which was an increase from June’s number of 55.3 percent. In our last M&A report three months ago, the PMI number was at 53.7, indicating that the manufacturing economy was growing slowly. This month’s reading indicates a sector that is still growing, but with an increasing growth rate.
Industrial M&A started the year well, with four mega deals announced. Smaller deals were less prevalent. The strongest areas within industrial M&A are still industrial machinery and energy related equipment. Horizontal consolidation and divestiture of non-core assets is helping the bottom line of established industrial companies.
VIII. Transportation, Logistics, Distribution
Companies in developed nations are using the current economic expansion to consolidate their existing markets and expand output. Relatively cheap financing leaves transportation, logistics and distribution companies expanding operations at a steady rate. Due to their relative performance of shipping, trucking, and airlines, there has been an increase in M&A for these sectors.
M&A across All Industry Sectors
Many analysts predict that 2014 is poised to be a record setting year for M&A activity. Seven years after the start of the financial crisis, companies are changing their attitudes about the economy. GDP growth is forecast at 3% for 2014, an improvement from the 1.9% realized in 2013, and a continuation on 2012’s positive 2.8% trajectory.
Understanding that top-line growth could be difficult to achieve following the financial crisis, many companies worked to become leaner. High levels of uncertainty led to risk aversion, particularly pertaining to expanding scale of operations. In response to the harsh environment, most companies refocused on improving operations in the five years following the crisis. This meant that companies divested non-core assets and released employees, raising cash in case of a further economic meltdown. The economy improved, and companies are now left with plenty of dry powder (excess cash for deployment). Continued low-interest rates leave cash earning negative returns and continues to encourage companies to invest money in growth initiatives and acquisitions, even if they are less focused on core operations. Positive economic forecasts suggest that 2014 may be the year when inactive capital is invested in both core opportunities and M&A.
How Can ClearRidge Help You Sell Your Business?
We are an experienced team of investment bankers and business advisors. ClearRidge provides you with discrete, professional and effective representation in the sale of your midsized business. You benefit from the advice and expertize of a team with decades of experience successfully completing complex merger and acquisition transactions for midsized companies all across the U.S.
ClearRidge Perspective for 2014
ClearRidge deal opportunities continue to gain very 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.
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 transactions and ensure 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.
Sources: This report has been compiled from government data, independent analysis, IBISWorld research, as well as PricewaterhouseCoopers, Deloitte M&A reports and other sources cited in the text.