Mergers & Acquisitions for Q3 2014 and Outlook through 2015
ClearRidge Report: Mergers & Acquisitions for Q3 2014 and Outlook through Spring 2015
We are in the fourth quarter of 2014 and data is now available for deal activity through the end of the third quarter. In this report, we review ClearRidge’s most active industry sectors and provide an outlook through Spring 2015. These 7 industries are also among the most active sectors that drive M&A Activity in Oklahoma and the Southern Midwest region:
i. Aerospace and Defense
iii. Construction and Engineering
iv. Energy: Oil and Gas
vi. Industrial Manufacturing
vii. Transportation, Logistics, Distribution
I. Aerospace and Defense
There were 49 aerospace and defense deals announced this quarter, which was a decrease from the second quarter. However, third quarter activity was about the same this year compared to 2013 (49 vs 48 respectively). The most active areas were MRO and Logistics (9 Deals), Machined and Cast Parts (8 deals), and Components and Subsystems (7 deals). The majority of deals in 2014 have been subsidiaries of larger companies or portfolio companies of private equity firms rather than standalone acquisitions.
Divestures and spin-offs remain popular among aerospace and defense companies. Most divestures have been fueled by a desire to exit businesses that have been impacted by decreased military spending and also efforts to offload small industrial units. Deal making on the defense side continues to be weak.
Despite a slight decline in deal volume in Q3 2014, deal value grew significantly year-over-year. Chemicals acquisitions were the highest this quarter since Q1 2011 and sector activity in 2014 is poised to show its highest annual value since 2010. Increased demand for high end-use markets, such as automotive, construction, durable goods, and plastics, fueled demand for chemicals.
On a regional basis, Asia led deal volume with 23 deals and North America led deal value with 12 large deals. Deal volume and value should continue to be strong throughout 2014 and into the Spring. The hike in activity is driven by an increase in larger deals, as companies merge to achieve greater economies of scale and scope.
III. Construction and Engineering
The number of construction and engineering transactions accelerated in Q3 2014. Consolidation among smaller, niche companies also increased significantly.
Global economic activity during Q3 2014 was mixed, with improving conditions in the United States; uneven results in Asia.
A major driver in consolidation is talent needs, as companies compete for specialist expertise in high demand niches. As an alternative to M&A, some companies are pursuing joint ventures, but in doing so still open themselves up to operational and strategic risks.
Transaction activity looks like it is going to remain robust as construction and engineering firms strive for a full line of services with a diversified geographic reach. Consolidation in the building materials segment will likely continue as overcapacity continues to plague the segment and companies continue scaling up to compete.
Note: ClearRidge’s transaction experience in engineering focuses on industrial, energy and telecommunications applications.
IV. Energy: Oil and Gas
Overall activity in oil and gas:
For the three month period ending in September 30, 2014, there were 78 oil and gas deals (14 of the 78 were mega deals representing 84 percent of the total deal value. Third quarter activity increased 20% from last quarter. The third quarter saw the highest number and value of shale deals in any third quarter over the last 3 years. The increase was driven primarily by continued activity in the upstream space. Private equity investors continued to show interest in the oil and gas industry this quarter with 6 transactions. Question marks remain about capital expenditures and acquisition activity through the remainder of 2014 and 2015 as uncertainty abounds with decreased oil prices
Upstream, Midstream, Downstream:
Upstream deals accounted for 42 deals.
Midstream accounted for 15 deals, a 50% growth in deal volume compared to Q2 2014.
Downstream deals accounted for 9 deals, the same as the previous quarter.
The number of oilfield services deals doubled from 6 in Q2 to 12 deals in Q3 2014.
Note: Within oil and gas, ClearRidge’s transaction experience is mostly in pipeline, oilfield services, related manufacturing, logistics and service industries.
Healthcare M&A activity increased again in Q3 2014. Deal volume increased 10% compared to the previous quarter, with 326 transactions and was up 19% compared to a year earlier. The third quarter was busy and the fourth quarter is projected to be even busier. Even with the federal government clamping down on companies taking advantage of lower corporate tax rates abroad, deal volume continues to grow.
In terms of most active sectors within healthcare, the following numbers represent the number of completed transactions: i) long-term care (80); pharmaceuticals (68); online health services (33); biotechnology (27) and medical devices (25). Other active sectors include physician groups (14) and home health and hospice (13).
VI. Industrial Manufacturing
Following a strong second quarter, M&A activity in industrial manufacturing remained robust in Q3 2014, with 55 transactions.
Oil, gas and petrochemical related companies again dominate in the industrial manufacturing industry. Energy related deals accounted for a quarter of the total deal volume year to date and as much as 40% of U.S. transactions. Several mid-sized private company transactions were completed in the valve, pumps and compression businesses.
Strategic buyers are the leader in transaction volume, but financial buyers have gained exposure to a variety of manufacturing end markets, with the common theme being a desire to gain high quality engineering and production differentiation. Private equity managers have been paying higher multiples in industries with consistent growth and room for margin improvement.
VII. Transportation, Logistics, Distribution
Transportation, logistics and distribution activity for Q3 2014 saw gains that were driven by smaller deals in the trucking logistics, shipping and passenger air sectors. There were 48 transactions, which topped 44 deals recorded in Q3 2013. Trucking and logistics in total accounted for more than 40% of the third quarter M&A activity.
Acquisitions in supply chain and logistics have been driven by local deals aimed at consolidating existing markets and strengthening their core business structure.
Freight forwarding businesses have been a big opportunity in the oil and gas sector. Freight forwarding companies will continue to expand their service options and expertise to meet growing demand in the oil and gas sector.
M&A across All Industry Sectors
Many analysts predicted earlier in the year that 2014 would be poised to be a record setting year for M&A activity. This still looks to be on track, but there is uncertainty creeping in surrounding the 2015 economic and M&A outlook.
Seven years after the start of the financial crisis, companies have been changing their attitudes about the economy. GDP growth is still forecast at 3% for 2014 in the U.S., an improvement from the 1.9% realized in 2013, and a continuation on 2012’s positive 2.8% trajectory. Indeed, the second-quarter growth numbers were revised higher and the third quarter showed 3.5% growth. Consumer confidence has been rising and hiring has been increasing. Inflation risks in the first half of 2015 seem limited and at most are predicted to knock 2015 GDP growth from 3% to 2.5%.
As the economy has improved, companies continue to have plenty of dry powder (excess cash for deployment). Continued low-interest rates leave cash earning negative returns and continue to encourage companies to invest money in growth initiatives and acquisitions, even if they are less focused on core operations.
One area of greater concern to the Southern Midwest region is energy prices. Millions of jobs, state budgets and related industries are bolstered by a strong U.S. energy market. While prices at the pump for consumers and costs for many businesses would be reduced, this area of the country will suffer if we see a prolonged dip in oil prices.
How Can ClearRidge Help You Sell Your Business?
We are an experienced team of investment bankers and business advisors who all work together on your project. 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 Spring 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.
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 reports and research including federal data, independent analysis, IBISWorld, PricewaterhouseCoopers, Janes, CFA, Deloitte and other sources cited in the text
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.
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