We are in the first quarter of 2015 and data is now available for deal activity through the end of the fourth quarter of 2014. 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
ii. Chemicals
iii. Construction and Engineering
iv. Energy: Oil and Gas
v. Healthcare
vi. Industrial Manufacturing
vii. Transportation, Logistics, Distribution
I. Aerospace and Defense
The past year has seen a noteworthy improvement in transaction activity after a lackluster 2013, with a 29% increase transaction in volume (total number of deals) and 61% increase in value (total dollar amount of deals). There was a strong upswing in defense-related transactions. Most of the year’s activity occurred among privately owned and smaller companies. The most popular acquisition targets, especially in the fourth quarter of 2014, were cyber surveillance, security, intelligence, and reconnaissance businesses.
Divestitures and spin-offs also remain popular within aerospace and defense. The most common driver of divestures has been a desire to exit businesses directly impacted by lower military spending, including divisions that produce vehicles, electronics and communication services. Spin-offs have helped to create more focused business portfolios as larger companies offload some of their non-core units.
The highly fragmented maintenance, repair, and overhaul (MRO) industry saw an increase in mergers and acquisitions. MRO companies are also strengthening their services to enhance capabilities, expand geographic reach and improve service offerings.
Financial investors remain active in the sector. Private equity and other financial investors showed renewed interest in aerospace and defense deals due to more stable revenue and strong orders in the commercial airline industry.
While 2014 activity improved over 2013, high valuations and an uncertain budget outlook may restrain mergers and acquisitions moving forward. As has been evident in previous quarters, there is also an assumption that consolidation among small-and mid-tier suppliers will continue to drive transaction activity.
II. Chemicals
In the fourth quarter of 2014, deal value among chemical companies declined from the previous quarter, despite a small improvement in volume. Gains in deal volume were driven in large part by an increase in middle-market deals. For full year 2014, volume and value improved mostly driven by third quarter results.
Specialty chemical targets were a large contributor to the improved deal environment in 2014. Deals involving financial investors increased slightly in 2014, with financial investors returning to the chemical industry as the industry continues to improve. Valuations rose in 2014, and were mostly driven by last year’s confidence in the economy. There are concerns that there will be a pause in transaction activity in the near future as acquirers wait to see the impact of depressed energy prices over a longer period.
III. Construction and Engineering
Total deal value soared in construction and engineering companies in 2014 and, even with a slight drop in the number of transactions in the fourth quarter, deal value for 2014 was more than triple than 2013. Regional buyers continue to scour for high quality businesses as they look to align business portfolios with long-term attractive markets.
Construction and Engineering continues on a path toward full service integration, which has a central theme of acquisition activity. Companies are increasingly using joint ventures and mergers to expand geographic reach and broaden service lines. Also, with increasing regulatory pressure, the focus has intensified on sustainable and green construction, with M&A activity expected to gain momentum in this niche.
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:
Mergers and Acquisitions in the energy industry hit a 10 year high in terms of deal volume and value in 2014, even with the oil prices plummeting in November and December. There were 19 midstream deals, 25 upstream, and 6 downstream and 7 in oilfield services.
The $35 billion dollar merger of Baker Hughes, the third largest oil-field services and construction machinery company, with Halliburton highlights both the potential and associated risks of consolidation in oil and gas aligned businesses. Deal activity could accelerate as companies focus on eliminating overcapacity and reassess the marginal profitability of oil and gas projects with lower oil prices. Both strategic and financial buyers with deep pockets and a longer-term outlook are best positioned to see through the current commodity pricing cycle and take advantage of shorter-term volatility to acquire stressed companies that are forced to sell. This would create opportunities for both strategic acquires and financial buyers.
Note: Within oil and gas, ClearRidge’s transaction experience is mostly in pipeline, oilfield services, manufacturing, logistics and service industries.
V. Healthcare
2014 has been one of the most active years in the last decade for mergers and acquisitions in healthcare. Much of the activity is due to prescription companies buying other companies to control their costs and deploy excess reserves of cash. Activity has also been fueled by low debt costs. Several hospitals have also indicated that they plan to acquire physician practices. Another trend taking off is electronic health record systems, new technology for medical devices and project management software and services focused on healthcare.
VI. Industrial Manufacturing
Total deal value soared in industrial manufacturing in 2014 and deal volume jumped over 40 percent compared to the prior year. Merger and acquisition activity continues to be driven by horizontal consolidation and divestures of non-core businesses. Companies are divesting non-core assets, leveraging scale and pursuing joint ventures and new strategic alliances to expand markets. The main goal is to align businesses with long-term growth strategies.
Going forward, market expansion and access to new technologies will drive M&A activity, especially in established markets. Companies with healthy balance sheets and hence favorable access to financing have a clear opportunity in 2015. Strategic as well as financial investors continue to pursue high quality industrial manufacturing assets and appear willing to acquire companies with stable growth prospects even at higher valuations. The outlook for 2015 deal activity remains strong.
VII. Transportation, Logistics, Distribution
Deal activity in Transportation, Logistics and Distribution ended at a low, with the fourth quarter accounting for the lowest deal value and second lowest deal volume of the year. M&A volume and transaction values remain near 10 year lows. Smaller regional deals remained popular and even with deals declining, smaller acquisitions were at a high level, mostly due to companies pursuing local-market opportunities. Shipping and trucking accounted for almost half of the year’s activity. The higher volume of trucking deals continues due to the high fragmentation in the industry, as larger companies look to roll up smaller companies and increase net share.
M&A across All Industry Sectors
Many analysts predicted a year ago that 2014 would be a record setting year for M&A activity and in many industry sectors, they were correct. The outlook for 2015, however, is less certain. In particular in those states where the economies are tied to energy prices, there are many businesses along the supply chain and related industries that will have a difficult outlook for 2015 and possibly 2016. With varying degrees, depending on their exposure to upstream energy activity, 2015 may be a year to reduce expenses and sit on the sidelines.
Conversely, depressed energy prices are a boon for certain industries and 2015 is likely to see a decoupling between merger and acquisition activity across all sectors and revert to a very different outlook industry by industry.
Seven years after the start of the financial crisis, companies have been changing their attitudes about the economy. Fueled by stronger consumer spending, the U.S. economy is forecast to grow at 3.3% this year, from 2.4% in 2014, and is forecast to continue to expand in 2016. Consumer spending in the fourth quarter of 2014 grew at the fastest rate in more than eight years. Furthermore, with unemployment declining, consumer confidence is at a seven-year high. With increased consumer spending, businesses will likely increase investment, housing is in recovery and building starts are expected to increase. The Federal Reserve has suggested that interest rates will start increasing in Spring or Summer this year. Until rates rise, continued low-interest rates leave cash earning negative returns and companies are encouraged to invest money in growth initiatives and acquisitions.
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.
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.
For further information on our team, industry expertise and transactions history, please visit www.ClearRidgeCapital.com.
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.
