Unprecedented third year fall sees M&A at lowest level for eight years but green shoots sprouting for overdue recovery in 2014

EY LLC, Kyiv, Ukraine, 
Thusrsday, January 16, 2014

·        Despiteheadline-grabbing mega-M&A and third largest deal ever, value falls

·        “Greenshoots” as volume of US$500-1b deals grows at fastest rate since 2000

·        Chinacements #2 spot in terms of value and volume

LONDON, KYIV, 16 JANUARY. Despite hopes that M&A movedinto asustained growth phase last year, 2013saw an unprecedented hat-trick – a third year of falling deal activityglobally. Those falls now see M&A at its lowest level for eight years andbelow “dot com” levels 13 years ago. Global M&A activity fell by 6.2%against 2012, with 37,257 deals announced during 2013, with value of US$2.3tdeclining 6.3%, despite a flow of megadeals – and in Vodafone-Verizon the thirdlargest deal ever – according to data analysis by EY.

Global M&A activity by dealvalue and volume
Sources: ThomsonOne, EY analysis(25.11.2013)

PipMcCrostie, EY’s Global Vice Chair, Transaction AdvisoryServices, says:

“While the last quarter of 2013 saw modestimprovement on the economic front, the M&A situation remained bleak. As aresult, deal inertia continued as many companies opted to spectate rather thanparticipate in the M&A market. But 2014 should finally see the turningpoint in this prolonged M&A recession. Deal fundamentals are strong interms of cash and credit availability. Improving boardroom confidence meansmany large corporates are planning to achieve growth through acquisition in2014.”

 China cements #2 position, butmature economies to lead growth of M&A in 2014

TheM&A picture was mixed across the BRIC nations, with sharp falls in activityin Brazil (-27.5%), Russia (-23.8%) and India (-9.2%). China was a relativebright spot in 2013, comprehensively cementing its position as the #2 marketfor M&A activity. Deal volume in China rose 4.6% against 2012, with valuealso rising 38%.

Unsurprisingly,China was also the most preferred emerging investment destination forglobal corporates in 2013.

However,sharper falls in M&A value globally were only averted by a relativelyrobust performance in the US, which saw deal value involving acquisitions of USbased assets up 27% on previous year.

OverallUS-related M&A, combining domestic, inbound and outbound transactionsinvolving US headquartered companies, contributed 52% by value and 28% byvolume of all global deals – illustrating the significant impact the dealeconomy in the US has on the global picture.

 “China’sglobal economic influence is expanding and that will continue,” says McCrostie.“But any return to growth for M&A in 2014 will be led by the matureeconomies as the majority of investment capital is being allocated to developedmarkets¹ and the volume and value of deals in those markets willhave a significant impact on the global deal economy.”

Germanytook #3 by total value, helped by a doubling of inbound M&A into thecountry, which totaled US$74b in 2013. The UK and Canada take the other placesin the top 5 by deal value.

Sectorshit by falling deal volumes

Globally,M&A activity dropped in most sectors dropped against 2012, with only Power& Utilities and Real Estate showing any growth in deal volume. The biggestfalls were Metals & Mining, down 27% and Oil & Gas, down 21% - notsurprising given the level of M&A activity in those sectors between2008-2010.

Interms of value, mega-deals saw Telecommunications rise 153%, helped by theVerizon-Vodafone transaction, Media and Entertainment was up 33% and LifeSciences was up 32%. Deals in the telecom sector are being driven by increasing appetite for bandwidth as operatorslook to provide more data-driven services. There have also been several notablecross-sector deals in the TMT space, such as Microsoft’s acquisition of Nokia’shandheld devices business and Vodafone buying Kabel Deutschland.

Metalsand Mining – in the absence of any deal approaching the size ofGlencore/Xstrata or TNK-BP – saw a 51% drop in value. Banking & CapitalMarkets, which was boosted in 2012 through the realignment of portfoliosbrought about by increased regulatory concerns also saw significant falls indeal value in 2013.

Growth prospects for 2014 – greenshoots already sprouting?

Despiteanother recessionary year for M&A, there is a real prospect of a dealrevival in 2014.

Morethan a third of global corporates plan an acquisition next year – a significantincrease in appetite compared to this time last year¹.

Thereare already signs of recovery in the critical US$500m - US$1b deal range, whichhas often been a bellwether of broader M&A activity. In the second half of 2013 there wasa 29% average monthly increase in deal volume in this bracket and 26% by value– the highest rise since 2000, with the exception of a brief 2010 rebound.

“Uppermiddle market momentum in deal activity points to growth – albeit modest – in2014,” says McCrostie. “We know that 68%[1] oflarge global companies expecting to do deals say they will pursue acquisitionsof between US$500m and US$1b in 2014. Megadeals are largely immune to marketconditions and will continue to happen. In addition, we now expect themid-market to fuel M&A growth as boards target assets that fit their growthstrategy.

“Followingyears of deal recession, we should see a slow, steady return of growth inM&A in 2014 as companies re-enter the transaction market, looking to dosmart and sustainable deal-making.”

Aboutthe data

Volumes andvalues data is sourced from ThomsonOne (25.11.13) and M&A appetite data from EY’s Capital ConfidenceBarometer (October 2013).

Values andvolumes are based on year to date data (25.11.13), extrapolated to year endbased on historically observed patterns of M&A (2000-12). This is appliedglobally, by geography and industry. Volumes are also uplifted based onanalysis of the lag in reporting by ThomsonOne.

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