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M&AIndexQ3 2014The Deloitte

Rising animal spirits continue tostoke M&A activity

Key points

Following the sharp rebound in deal volumes in Q2, Deloitte forecasts a continued uptick

for Q3 2014, bolstered by strong economic results and renewed market confidence.

We expect global deal volumes to reach around 8,350 by the end of Q3 2014,

up 9% over the same period in 2013.

The IPO boom continues and in H1 2014 companies have raised proceeds of

$103 billion which is a 20 per cent increase over the same period in 2013.

However, our analysis shows IPO proceeds earmarked for investment in growth aredeclining, which may prompt closer investor scrutiny.

The animal spirits are spilling over to M&A markets and we are seeing the return

of hostile bids.

Contacts

Iain Macmillan

Head of UK M&A

020 7007 2975

[email protected]

Sriram Prakash

Head of M&A Insight

020 7303 3155

[email protected]

About the Deloitte M&A Index

The Deloitte M&A Index is a forward-looking indicator that forecasts future global M&A deal volumes and

identifies the factors influencing conditions for dealmaking. The Deloitte M&A Index has an accuracy rate of over

90% dating back to Q1 2008.

Figure 1. The Deloitte M&A Index

Global M&A deal volumes

6,500

7,000

7,500

8,000

8,500

9,000

9,500

Q12010

Q22010

Q32010

Q42010

Q12011

Q22011

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Q32013

Q42013

Q12014

Q22014

Q32014

Quarter

Deloitte M&A Index (projection) M&A deal volumes (actuals)

Q3 2014M&A dealforecast

High: 8600

Low: 8100

Mid: 8350

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The Deloitte M&A Index Q3 20142 |

The IPO boom continues

The IPO market continues to perform strongly

underlining the continued market confidence

while a number of high profile listings are stilldue to take place this year across a number

of sectors. Year to date, over 700 companies

have come to market globally totalling 53%

of 2013 volumes, the highest recorded first

half IPO volumes since 2011. Companies have

raised proceeds of $103 billion which is a

20 per cent increase over the same period

in 2013.

however, only small amounts of the

IPO proceeds are being channelled

towards growth

An interesting feature of the IPO surge in 2014 is

that only a modest amount of the proceeds are

being channelled towards growth. When we

analysed the disclosed use of the proceeds, we

observed that in 2014 only 14.5% is earmarked

for capex activities, 1% for working capital

and 8% for future M&A activities. In addition,

we found nearly 34% of the proceeds were

channelled towards general corporate purposes,

an 8% increase over 2013. It seems companies

are taking advantage of the favourable

conditions to raise equity, but have not yet

decided how they want to use the proceeds.

However, there are significant variations across

geographies. Companies listing in Asia-Pacific have

earmarked nearly 37% for capex, as compared to21% by North American companies and a meagre

4% by European companies. On the other hand,

European companies have earmarked around

11% for M&A activities, compared with just

0.4% for North American companies.

With recent turbulence in the post-IPO performance

of some companies, as well as some withdrawals,

we expect investors may require companies to

show greater transparency and clarity on how

they plan to use proceeds to fund growth.

Factors influencing M&A in Q3 2014

050100150200250300350400450

0

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IPO issuance ($bn)Deal volumes

Year

Volumes Sum of proceeds

Source: Thomson Reuters; Deloitte analysis

Figure 2. Global IPO volume and issuance ($bn) (H1 2007 H1 2014)

Figure 3. YoY percentage change in IPO proceeds (2013 v 2014)

-15 -10 -5 0 5 10

General Corp. Purp.

M&A

R&D

Balance Sheet

Investments

Others

Payment-

Shareholders

Capex

Working Capital

Repay debt

% change of total proceeds (percentage points)


-14.1%

7.9%

2.6%

1.4%

1.1%

0.7%

-0.1%

-0.3%

-0.4%

-1.1%

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Withdrawn deals

The M&A market saw $216 billion of

withdrawn deals within the first six months of

the year. Deloitte estimates that on averagearound 3% of deals are withdrawn each year

and 2014 is no different. The key difference

this year is that a handful of high profile deals

account for the majority of the withdrawn

deal values. For instance, one high profile

pharmaceutical deal alone accounts for

43% of total withdrawn deals by value.

Animal spirits

Such high profile deal withdrawals also

point to a trend of rising hostile bids. It isindeed striking that of the deals that were

withdrawn this year, the average premium

offered was 27x compared with the average

deal premium of just 13x for announced

deals. Looking ahead, it seems likely that

getting deals to completion, particularly for

larger deals, is going to get more complex

due to increased political and regulatory

scrutiny, wider stakeholder interests and rising

valuations. Going hostile is an expensive

alternative and fraught with problems, but it

also indicates that animal spirits are returning.

Factors influencing M&A in Q3 2014

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Figure 4. Withdrawn deal volumes and disclosed deal values ($bn)(Q1 2008 Q2 2014)

Deal volumes Disclosed deal values ($bn)

Quarter


Disclosed deal values ($bn)Deal volumes

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Figure 5. Disclosed deal values and deal premiums of withdrawn deals

(Q1 2010 Q2 2014)

Disclosed deal value ($bn) Deal Premium

Quarter


Deal PremiumDisclosed deal value ($bn)

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Analysis of the S&P Global 1200 company

fundamentals yields four key insights.

First, average revenue growth fell from

0.2% in Q4 2013 to -0.2% in Q1 2014 withcorporates struggling to keep pace with

analyst earnings estimates.

Second, overall average cash in hand

increased from $6.2 billion in Q4 2013 to

$6.5 billion in Q1 2014. However, average

cash held by US corporates fell by $209 million

per company while European and Asia-Pacific

corporates increased their cash reserves by

$372 million and $1.6 billion respectively.The drop in US cash reserves can be attributed

both to severe weather disrupting output and

a two-speed recovery in the M&A markets,

with US companies leading the way.

Third, average dividend payments increased

from $164 million in Q4 2013 to $188 million

in Q1 2014 continuing the trend of returning

cash to shareholders.

Finally, average capital expenditure saw a

sharp fall from $535 million to $403 million

after four consecutive quarters of increased

investment. Much of this fall can be attributed

to energy and resources companies shrinking

their capital intensive projects.

Corporate barometer

Figure 6. Company fundamentals (S&P Global 1200) (Q4 2013 vs.Q1 2014 average)

Source: Bloomberg; Deloitte analysis

Q4 2013 average Q1 2014 average

Average cash in hand ($bn)

Average EPS ($)

YoY average revenue growth (%)

Average dividend paid ($m)

Average capital expenditure ($m)

Average FCFF ($m)

0

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-5

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10

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250

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600

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164

188

535

403

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542

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Geographies

Two-speed M&A recovery

Since Q1 2013, North America has been

gaining M&A market share over other

geographic regions. Their market share hasincreased from 37% of involvement in global

M&A deal volumes to 43% in Q2 2014.

North American firms have also been involved

in 58% ($427 billion) of all disclosed deals by

value in Q2 2014.

Despite the severe weather related setbacks

which saw the US economy shrink 2.9% in the

first quarter, US companies are at the forefront

of dealmaking and have record levels of cash

held overseas. Specifically, US acquisitions

account for 55% ($404 billion) of all d isclosed

deal values in Q2 2014, more than any other

geographic region.

Europe a target for US companies

After years of tepid growth, European

companies appear sub-scale compared totheir peers and may now be attractive M&A

targets for global competitors. US companies

are particularly acquisitive; in Q2 2014 they

recorded the highest deal values into Europe

since Q2 2012. Much of this increased deal

activity can be attributed to the large cash

reserves that US companies are holding

overseas and, with high tax levies imposed

on repatriating cash back to US, they have

started spending it more aggressively inEurope. Many European countries have lower

corporate tax rates than in the US making the

prospect of tax inversion particularly attractive.

Year-to-date, US companies have spent

$89 billion on European companies and we

expect them to spend in excess of $150 billion

on European deals this year.

Figure 7. US dealmaking versus other geographic regions (Q1 2013 Q2 2014).

0

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60

2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2

Market share (%)

Quarter

United States Europe Asia-Pacific

Africa & Middle East


South America

Figure 8. US acquisitions into Europe (Q1 2008 Q2 2014)

2008Q1

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Positive signs of M&A recovery across

sectors

M&A deal volumes and disclosed deal values

have increased in every major industrysector except for financial services in

H1 2014 compared to H1 2013, signalling a

step-change in the M&A environment.

The biggest benefactor of increasing deal

activity has been the TMT sector which has

seen H1 2014 deal volumes increasing 18%

year-on-year and disclosed deal values up

187%. The TMT sector is currently sitting on

cash piles of over $1 trillion and continued

M&A and consolidation is highly likely.

The life sciences and healthcare sector has

seen a significant increase in dealmaking with

disclosed deal values up 369% year-on-year.

The patent cliff is one of the primary drivers

behind this surge. The top 12 pharmaceutical

companies globally are due to be hardest hit

and are expected to lose $50 billion of global

sales.1Companies are also using M&A to

focus on preferred therapeutic areas and are

doing so through asset swaps, divestments of

non-core businesses and partnerships.

Sectors


Figure 9. Global deal values by sector (H1 2013 v H1 2014)

0

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350

Lifesciences

&healthcare

Technology

,

media&

telecomm

s

Financia

l

service

s

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r

busines

s

Manufacturing

Energy&

resource

s

2013 H1 2014 H1

Sector

53

251

293323

145

167151 158

102

7769

106

Disclosed deal values (US$bn)

2008Q1

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Figure 10. Global deal values and volumes in life sciences and healthcare sector(Q1 2008 vs. Q2 2014)

0

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1 Evaluate, Evaluate Pharma World Preview 2013

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Charts we like

Figure 11. UK unemployment figures (2000 2014E)

Unemployment numbers (million) Unemployment (%)

4.0

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2014E

Unemployment number (millions) Unemployment %

Year

Source: Economist Intelligence Unit; Deloitte analysis

Figure 13. S&P Global 1200 cash by geography

(Q1 2008 Q1 2014)


200,000

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1,200,000

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Corporate cash (US$m)

Figure 15. S&P Global 1200 spend on dividends vs. capex(2000 YTD2014)


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Figure 12. S&P Global 1200 headcount growth (2001 2014YTD)

Headcount

Year


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Figure 14. S&P Global 1200 revenue growth vs. share price

(2001 2013)


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S&P Global 1200 index Revenue growth (%)

Figure 16. S&P Global 1200 M&A spend as % of market cap(2000 2013)


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Europe United States

S&P Global 1200 M&A spend

as % of market cap

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Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198.

Designed and produced by The Creative Studio at Deloitte, London. 36044A

About the Deloitte M&A Index

The Deloitte M&A Index is a forward-looking indicator that forecasts future global M&A deal volumes andidentifies the factors influencing conditions for dealmaking.

The M&A Index is created from a composite of weighted market indicators from four major data sets:

macroeconomic and key market indicators, funding and liquidity conditions, company fundamentals, valuations.

Each quarter, these variables are tested for their statistical significance and relative relationships to M&A volumes.

As a result, we have a dynamic and evolving model which allows Deloitte to identify the factors impacting

dealmaking and enable us to project future M&A deal volumes. The Deloitte M&A Index has an accuracy rate of

over 90% dating back to Q1 2008.

Notes:In this publication, references to Deloitte are references to Deloitte LLP, the UK member firm of DTTL.

About the authors

Sriram Prakash and Russell Shoult are the UK Deloitte Insight team for M&A, based in London.

Haranath Sriyapureddy, Abhimanyu Yadav and Sukeerth Thodimaladinna are M&A analysts in the Business

Research Center at DTTL.

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