Mergers & Acquisitions Outlook for 2016 and Q3 2015 Review

We are in the fourth quarter of 2015 and deal data is now available through the end of the third quarter.  In this report, we review our region’s most active industry sectors and give an outlook for 2016.

Analysis by Sector

These 7 industries are also among the most active sectors that drive M&A Activity in our region:

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

1. Aerospace

Aerospace is having a strong 2015. There have been a number of banner announcements, as well as activity among midsized private companies. The highest value M&A deal of all time took place in third quarter of this year, with Berkshire Hathaway’s acquisition of the highly profitable (25%+ EBITDA) and dominant aerospace component manufacturer, Precision Castparts that has grown through an aggressive acquisition strategy and relentless focus on lean operations, to become the leading supplier in its industry.

Macro drivers are good for aerospace. Interest rates are favorable, operating costs are relatively low and demand remains promising. Order backlog in commercial aerospace is strong and there is perceived long term value in the industry. Valuations have been rising however, which has caused many business owners and investors to consider cashing in on high sale prices.

Airlines have been consolidating within regions and global airlines have been expanding with minority investments in foreign airlines in growing markets, for example the Delta-China Eastern deal.

FBO acquisitions have continued, led by the acquisition of Landmark FBO in the third quarter. Aerostructures activity was led in the third quarter by GKN’s acquisition of Fokker Technologies.

Aerospace-focused technology companies have also had an active third quarter with several acquisitions of technology companies focused on fuel efficiencies, support services and operational efficiencies.

2. Chemicals

Overall, the third quarter of 2015 saw increased deal values in chemicals compared to the second quarter, however volume declined year-over-year.  Fertilizers, agrochemical and specialty chemicals were responsible for half the deal activity in the chemical sector.

Lower farm incomes and lower commodity prices have squeezed growth and agrochemical demand, fueling consolidation among agrochemical suppliers and manufacturers.

Overall, chemical company valuations increased in the third quarter, with increased strategic activity, who in many cases are the only buyers able to pay higher prices and realize synergies to justify the higher prices. Integration planning and execution are key with higher valuations.

3. Construction and Engineering

Construction and engineering transaction activity continued at a strong pace in the third quarter in both deal volume and value. Within the sector, 2015 is on pace to be the second highest year for transaction value since 2007.

Construction spending has neared its highest levels in over a decade, with strength in both residential and nonresidential markets.  Further consolidation is likely among larger construction companies as the building outlook improves.  Construction companies are also looking to add niche services, enhancing their divisions by acquiring specialty engineering and niche service companies that have scale to grow.

The biggest challenge for potential acquirers is predicting and planning for long-term volatility in demand.

4. Energy: Oil and Gas

With depressed oil and gas prices, the energy industry has seen revenues and profits declining again in the third quarter, with continuing budget reductions. Many industry participants foresee low prices through 2016, but despite all the negatives in the industry, many companies are now considering transformational investments and acquisitions.

Industry participants have been looking to increase the efficiencies of current rigs, find additional cash generating strategies and reduce current costs, which have come in the form of reduced payroll and exploration budgets. In this market, it is still cost effective to maintain most existing wells, but companies are hesitant to begin new drilling projects. To generate cash, many producers have been divesting non-core production, which has resulted in investment opportunities for equity investors outside oil and gas to participate.

There is confidence that deal activity will pick up over the next 12 months, but asset repricing will likely trigger a credit squeeze on energy companies, even if the short-term outlook improves.

5. Healthcare

The third quarter of 2015 saw the consolidation of several healthcare payors and providers, led by Anthem’s mega-merger with Cigna and Aetna’s merger with Humana. Israel’s Teva Pharmaceuticals also acquired generic drug producer Allergan. All in all, the third quarter was busy for healthcare M&A with 337 acquisitions of healthcare providers and service companies, 179 healthcare equipment and supply companies and 162 healthcare technology companies.

Healthcare valuations remain strong and there is still demand at higher prices, as acquirers are looking to build market share and drive down costs.  Since the lowering of Medicare and Medicaid reimbursement rates by the federal government, the healthcare industry has been searching for ways to decrease capital expenditures.

Another focus has been the acquisition of specialist and discretionary healthcare service providers and clinics with strong relationships between the patient and physician.

Healthcare technology had one of its strongest quarters, as acquirers chase the investment and implementation of new healthcare personal technologies that provide patients with better access to records and healthcare choices through mobile and cloud healthcare platforms.

Laboratory services remain fragmented due to the specialized nature of each laboratory’s operations. The consolidation of laboratories has been difficult to expedite, but there have been efforts from healthcare providers to acquire laboratory-services companies. This segment is experiencing a shift towards automation as laboratory services are becoming more streamlined.

6. Manufacturing

In spite of a strong dollar, global uncertainty and the impact of commodity prices, manufacturing output has grown every month for almost three years, according to PMI data. However, U.S. factories were running at 75.9% capacity in September, down from 76.1% in August and there are concerns about slowing growth in manufacturing. Acquisition activity, however, has remained strong.

Merger and acquisition activity in the third quarter of 2015 continued to rise among manufacturers.  Strategic buyers continue to adjust product portfolios targeting high-growth markets through acquisitions. With enough cash at their disposal, investors have been active in diverse profitable end markets in manufacturing.

Investment continues in automation, efficiency, and machine communication, as well as next generation robotics and technology, but infrastructure and supply challenges remain a concern.

7. Transportation, Logistics, Distribution

Although there was a decline in deal volume in the third quarter compared to the second, average deal value increased for the fourth straight quarter.  Logistics companies remain a driver of merger and acquisition activity in the third quarter, and there is confidence this continues in the future.

Trucking continued to be an active-deal making segment, as smaller operators decide to cash out rather than invest in new machinery and equipment. Trucking companies are struggling to recruit drivers and continue to pursue greater efficiencies and increased utilization.

Even with the decline in deal activity in the third quarter, the fourth quarter has historically been stronger for transportation deal volumes as strategic investors plan investments for the next year.

M&A across All Industry Sectors and the Macro Drivers of M&A

2015 has been the year where we speculate about the Federal Reserve’s action with interest rates and all the while, abundant cash and cheap credit are fueling acquisition activity across many industry sectors. After signs of weakness in the summer, the Fed delayed their interest rate decision and analysts now expect a 25 basis point rate rise in December. Until interest rates start to rise, continued low rates leave cash earning negative returns and companies are encouraged to invest money in growth initiatives and acquisitions.

The U.S. GDP forecast is still poised for solid growth in the second half of 2015, expected to grow 3.0% in the final quarter, which would bring GDP growth to 2.5% for 2015.  This includes 0.6% for the first quarter (bad winter weather), the strong rebound in the second quarter with 3.7% GDP growth and the modest 1.5% growth in the third quarter.  However, the strength of the U.S. dollar (impacting exports) and declining investments in the oilfield continue to weigh on full year growth. 2016 growth is currently forecast at 2.8%, fueled by consumer spending, which accounts for over two thirds of the U.S. economy.

The biggest drag on our economy continues to be weak exports (strong dollar) and concern over international demand for U.S. goods – consider China and European economy declines and 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 unemployment rate dipped to 5.0% in October after a weak August and September; although when combined with those who work part-time and want full-time work, the unemployment-plus-underemployment rate was just below 10% in October; however, this has been improving over the last twelve months. As a frame of reference this 10% figure is down from 17% at the peak of the recession.

Long-term interest rates should end the year about 2.3%. Core inflation (excluding food and energy) is forecast to reach around 2.1% this year, which remains modest and is expected to remain at this level through 2016. The Federal Reserve is unlikely to raise rates quickly next year 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 be flat this year and there are expectations for moderate increases through 2016. Durable goods orders (proxy for business investment) declined in August and September, but moderate growth in business spending and durable goods orders are expected for 2016.

According to Pitchbook (mainly private equity deal reporting), the third quarter of 2015 saw the fewest deals completed in the last two years, but the value of deals was up over the same period last year. The median deal size increased from $33.4 Million in Q3 2014 to $38.9 Million in Q3 2015. It was another mixed picture, which is reflected in the breakdown you’ll read below in our report on 7 active industry sectors.

ClearRidge Perspective for 2016

Pre-emptive company analysis and due diligence continues to be critical for any business selling for a premium price in 2016. Clients trust ClearRidge to deliver a confidential and discrete sale process, to remove obstacles to close a transaction and ensure only the best prospective buyers with the capital and commitment to close a transaction make it to the closing table.

The leading strategic buyers demand professionally prepared data and analysis on a selling company, earlier in their review of each acquisition opportunity, including deep transactional and financial analysis.  Companies that are better prepared prior to the sale process have been rewarded with higher valuations, smoother due diligence and a quicker cycle to closing the transaction and getting paid.

How Can ClearRidge Help You Sell Your Business?

ClearRidge advises business owners and helps them to make better strategic decisions about the future of their company; to provide an outsourced team of industry-leading professionals. Leveraging decades of experience successfully completing complex merger and acquisition 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. Our 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. Business owners hire ClearRidge to sell a company. 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, MergerMarket, ICF, PricewaterhouseCoopers, Janes, Deloitte and other sources cited in the text. Business Broker in Tulsa.

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.