KPMG: Abundant cash to drive M&A increases next year; techs the target.
Companies foresee putting their abundant cash to use in 2015 to pursue more mergers and acquisitions as they search for growth, according to recently released survey by KPMG.
The survey of 738 M&A professionals, investors and advisors found that 82 percent anticipate that their US companies or clients will pursue at least one acquisition in 2015, compared to 63 percent 2014. Nineteen percent foresaw two acquisitions and 11 percent predicted three.
Fewer respondents anticipated M&A involving companies with valuations of less than $250 million—50 percent in 2015 compared to 77 percent in 2014—while they expected acquisitions of larger companies to pick up significantly. The percentage of respondents anticipating M&A activity involving target companies with valuations between $250 million and $1 billion is more than double in 2015 compared to this year, and the percentage of those expecting M&A among companies valued at more than $1 billion, a much smaller universe, jumped to 7 percent from 4 percent.
Phil Isom, Global Head of M&A at KPMG, said that combining companies’ large cash reserves with transaction activity and target valuations that are expected to remain strong or even increase, suggests they should consider planning for an increasing use of cash for acquisitions.
“For companies with leaner cash or for those planning to pursue larger acquisitions, it may be prudent to put into place and/or solidify capital markets strategies and relationships in order to access additional capital through the debt and equity markets,” Mr. Isom said.
Seventy-three percent of respondents anticipated the US to be the most active market for M&A in 2015, up from 56 percent this year. That contrasts with M&A activity in Western Europe, China and Brazil, which respondents saw falling sharply—for example, only 14 percent of respondents saw Western Europe as the most active market in 2015, down from 29 percent who held that view for this year.
Mr. Isom said US companies continue, nevertheless, to look for transactions overseas to expand their geographic reach.
“Acquiring international targets may also represent an attractive and potentially tax efficient way to utilize cash held overseas versus” repatriating it,” Isom said, adding that survey respondents indicated that emerging market opportunities would be a primary M&A driver next year.
In terms of sectors, 47 percent expected the most transaction activity in technology in 2015, compared to 33 percent in pharmaceutical and biotechnology, 30 percent in financial services, and 27 percent in oil and gas.
Mr. Isom said corporate treasury departments continue to play an important role in planning and structuring transactions, incorporating tax implications and efficient structuring to maximize sellers’ proceeds and the acquirer’s overall transaction economics.
“With the compliance and control environment as important as ever, it also remains imperative for Treasury to take an active role in transaction diligence, integration planning/execution, and systems,” Mr. Isom said, “If not already the case, it is advised for treasury to form an effective relationship and roadmap with corporate development and M&A groups.”
A major M&A driver, Mr. Isom said, is the convergence of technology and business opportunity, which is producing a flood of revenue stemming from cloud, mobile, and data and analytics (D&A) applications, and enabling new business models.
“The shifts towards D&A, mobile and digital business models are influencing M&A strategy decisions to drive speed to market by obtaining assets that create a competitive edge for organizations,” Mr. Isom said.
Energy companies, for example, face regulatory uncertainties and Cyber threats, raising concerns that are driving the need to improve performance and consolidate core businesses through more M&A, streamlined operations and emerging technologies, Mr. Isom said.
In healthcare, “The business environment has become increasingly more complex due to convergence factors, including economic, regulatory, technological and consumer pressures that are forcing health plans, providers, and drug and device makers to rethink how they do business,” Mr. Isom said. He added that healthcare companies are “either gaining new revenue or protecting existing revenue – and to do so, many are turning to M&A.”