M&A activity has been trending upward in the last year and half to two years. There was a particular uplift in 2015 which reached the record-breaking value of $4.3 trillion worldwide. Some of that was fear-based because of what was going to happen with capital gain rates so many deals were completed in the latter half of 2015. Although activity dropped in 2016, it was still one of the most active years in the past ten years.

So far in 2017, average deal size is up and the number of deals is down for worldwide M&A activity. According to Reuters data, global M&A value reached $778 billion, increasing 12% while the number of deals decreased reached 11,441, a 9% decrease when compared to 1Q 2016. In the US deal value rose by 5% and the number of deals rose by 20%.

Middle Market Opportunity

Globally, bigger deals are back in vogue, and M&A is still being driven by strategic buyers rather than financial buyers. Large companies now have more confidence in deploying cash to execute these large transactions. However, not all of these large acquisitions will stick. There may be some “corporate indigestion” after taking such large bites and there will likely be some seeds and bones they will end up having to spit out in the form of spinoffs or divestments. That creates challenges and opportunities for the middle market companies who have the chance to fill some of those gaps.

M&A Outlook

In general from everything we are seeing right now, we expect activity will be robust for the next 12 months through the end of the 1Q 2018 , especially with the potential for tax reform related to repatriation of foreign cash. Leaders should anticipate a wave of activity from competitors, customers and suppliers and be prepared to handle changing industry dynamics. Strategic buyers should expect more competition from private equity groups as interest rates rise and PE groups become more active.

Click on the infographic for a closer look at M&A in the first quarter of 2017.

M&A Update 1Q 2017 - Capstone Strategic

Feature Photo Credit: Barn Images, Infographic by Capstone Strategic, Inc.

Global M&A reached $3.7 trillion in 2016, dropping 16%, and the number of deals increased slightly by 1% when compared to last year. While 2016 did not match 2015’s record-levels, activity was still robust. Compared to 2014, activity increased by 5%.

Activity in the fourth quarter reached $1.2 trillion with 13,504 deals announced, a 50% increase in deal value and 18% increase in the number of deals when compared to 3Q 2016. This year, there were a number of interesting deals to note, including the AT&T’s acquisition of Time Warner transactionVerizon’s deal with Yahoo, and GE Oil and Gas combining with Baker Hughes.

Click on the infographic for a closer look at M&A in 2016.

M&A Update Year End 2016 - Capstone Infographic

2016 continued be a strategic, rather than a financial buyer’s market and strategic buyers deployed large cash reserves to pursue growth through M&A. Unlike financial buyers, which typically look for a three to five years return on investment, strategic buyers can afford to pay more due to their long-term focus.

The middle market has been eager to use M&A as a viable tool for growth. Despite a challenging economic environment, activity in the middle market remained stable in 2016, dropping only 3.5% in 3Q 2016.

As we close out 2016 and look forward to 2017, here is a roundup of the most popular posts of the year from the Successful Acquisitions blog.

  1. The Most Important Thing about M&A According to Warren Buffett
  2. 10 Signs You Should Walk Away from a Deal
  3. M&A Activity after the U.S. Election: Analysis and Outlook
  4. 7 Strategic Questions to Ask Before Pursuing Mergers & Acquisitions – New Webinar
  5. How to Avoid Irrational Decision-Making in M&A
  6. 5 Tips for Taking a Strategic Approach to M&A in 2016
  7. Is Middle Market M&A on the Rebound?
  8. Growth Through Acquisition – Exit Readiness Podcast Interview
  9. How to Break Bad News without Sinking Your Acquisition
  10. What Is Happening with Valuation Multiples Today?

Thank you for reading and we will see you all in 2017.

Photo Credit: Barn Images

After hitting record-high levels in 2015, global M&A activity dropped significantly in the first half of 2016. It was the slowest first six month period for global mergers and acquisitions in the past two years. The value of deals decreased from $2.03 trillion to $1.65 trillion (19%) while the number of deals decreased from 22,153 to 21,087 (5%). While overall activity declined, deals announced in the second quarter of 2016 increased by 24% when compared to the first quarter. The downturn in value has been attributed to fewer mega deals (deals over $5 billion).

Global middle market M&A (deals under $500 million) remained relatively stable compared to overall activity. Deal value and volume fell by just 6% and 2%, respectively.

Looking to the future, uncertainty hampers M&A activity. Dealmakers cited concerns about “Brexit,” the U.K.’s vote to leave the European Union and the upcoming U.S. presidential election in November.

Deals in the News

M&A update 1H 2016 Infographic

2015 was the “strongest year for deal making on record,” according to Thomson Reuters.  Global deal value reached $4.7 trillion, a 42% increase from 2014, and U.S. deal value reached $2.3 billion, a 64% increase. Despite this record-breaking activity, the number of deals announced globally remained relatively flat and in the U.S., the number of deals actually decreased by 1.65% from 10,129 in 2014 to 9,962 in 2015. This is mainly due to the large number of mega deals (deals over $5 billion) announced in 2015.

As we look forward to what will most likely be another year of exciting M&A activity, let’s take a look back at the posts from the Successful Acquisitions blog that you, our readers, found most interesting.

  1. Why You Don’t Need a 51% Stake to Control a Business
  2. CVS and Target Pharmacy Acquisition, Divestiture and Co-branding
  3. Strategic vs. Financial Acquisitions – What’s the Difference?
  4. How You Can Manage the M&A Process: Tools for Success
  5. Strategic Acquirers at an Advantage in Today’s Market
  6. Why ConAgra Plans to Sell Ralcorp Less than 3 Years Later
  7. New Webinar – “Leadership Essentials for Successful M&A”
  8. When Organic Growth Stalls, Consider M&A
  9. Pharmaceutical M&A: The Rush to Acquire
  10. 2014 Record Breaking Year for M&A
Photo Credit: Barn Images

M&A activity in the first 9 months of 2015 remained strong reaching $3.2 trillion globally. It was the strongest first 9-month period since 2007 for global mergers and acquisitions.

The trend of large, mega deals continued in the third quarter of 2015.  Global deal value increased by 32% in the first 9 months of 2015 when compared to the same time period in 2014. On the other hand, deal volume remained relatively flat, only increasing by 2.3%. The average deal size was $103 million, a 30% increase from 2014.

In the US, there were $1.5 trillion in the first nine months of 2015, a 46% increase in value when compared to the first 9 months of 2014.  Click on our infographic for more insights on M&A activity in 3Q 2015.

M&A update 3Q 2015

 

Feature Photo Credit: Mark Dixon via Flickr cc

Global dealmaking remains robust, reaching $2.2 trillion in the first half of 2015, according to Thomson Reuters data. This is an increase of nearly 40% from the first half of 2014 and the most active half since 2007. However, the number of deals only increased slightly, by 3%. The trend of fewer, larger transactions continues: mega deals accounted for 50% of M&A value in the first half. Average deal size increased by 34% when compared to 1H 2014.

M&A is strong due to favorable market conditions: abundant cheap financing, record stock prices, and renewed confidence in the economy. The U.S. market continues to drive global activity. U.S. transactions reached a record $1.02 trillion – the first time activity passed $1 trillion in a half-year period.

Check out our infographic for more:

M&A Update 1H 2015

 

Global mergers and acquisitions reached $854 billion in the first quarter of 2015, a 25% increase from 2014 values. According to the Financial Times, this is the fastest start M&A has had since 2007.

While deal value increased dramatically in the first three months of 2015, the number of deals decreased slightly. The trend of fewer, larger transactions continues in 2015. Average deal size for Q1 2015 was $93 million, a 28% increase from $73 million in Q1 2014.

Check out our infographic for a snapshot on global mergers and acquisitions in Q1 2015. Click on the image for a closer look.

M&A Update Q1 2015 Infographic

Feature photo credit: rodposse via Flickr cc

Next year will be a strong one for strategic acquirers. A KPMG survey reports 82% of executives expect to execute at least one acquisition in 2015, up from 63% in 2014. This is consistent with what Capstone has been seeing in the marketplace. Our survey of midmarket executives earlier in 2014 revealed that, 60% of midmarket executives reported M&A activity in 2014 and 44% already plan to execute an acquisition in 2015.

2015 Mergers and Acquisitions

Expect robust M&A activity in 2015. Click on the infographic for a closer look.

Large cash reserves, low interest rates and consumer confidence are key drivers behind M&A activity. U.S. corporations held a record $1.65 trillion in cash in mid-2014 and have finally begun spending their war chest on stock buybacks and M&A. The study anticipates large deals valued at $250 million, $500 million and $1 billion.

“Buyers are paying a premium for targets that will allow them to realize long-term strategic goals and gain an advantage over the competition,” says Dan Tiemann of KPMG.

This is good news. For too long after the recession, corporate America has been afraid to take risks. Many companies have remained on the sidelines and others have focused on acquisitions driven by cost-cutting to increase profits rather than on a sustainable strategy.

We have long encouraged clients to pursue targets that most closely support their long-term growth, including not-for-sale acquisitions. This may mean paying a little bit more upfront to execute an acquisition that will grow your business exponentially. Strategic acquirers do not qualify “good deals” on price alone. They understand the cheapest or the easiest deals do not necessarily meet their needs. Instead, they are looking for the company that will best serve their growth objectives.

Strategic acquisitions allow you to accelerate your growth and open up many opportunities that are unavailable through organic means alone. I am encouraged that more companies are thinking about long-term strategic growth—and I hope you are, too!

At first glance you may ask, “Why in the world would Warren Buffett buy Duracell?”

One explanation is financial. Through a bit of fiscal engineering Berkshire Hathaway is able to avoid triggering significant taxes. The Duracell transaction, is essentially a merger through a stock swap. Berkshire will give P&G $4.7 billion of the shares it now owns and P&G will infuse $1.8 billion in cash into Duracell before the deal closes in 2015, Reuters reports.

The financial aspect aside, it is puzzling why Warren Buffet wants to acquire Duracell. The battery industry is a fairly mature market. What more can he do?

We may be tempted to think “mature” equals “boring,” but there is still room for creativity. The Duracell transaction is just one example.

Last month, Berkshire Hathaway acquired Van Tuyl Group, an $8 billion automotive dealership. Again, this is a mature industry. The reality is that Berkshire Hathaway sees this acquisition as an opportunity to consolidate and to add what we call “optionality.”

Now, not only will Berkshire Hathaway sell you a car, they may offer a preferred rate at Geico insurance, an after-market warranty package and even financing. By acquiring these businesses, Warren Buffett is able to bundle and sell more things under the family of Berkshire Hathaway.

Even if you are in a mature market, I challenge you to creatively look for growth opportunities.

In the first nine months of 2014, US transactions made up 51% of global mergers and acquisitions indicating confidence in the strength of the US economy.

In Europe, cash-stuffed German companies looked to international markets, especially the US, to drive growth. Recent deals include Siemens acquisition of Dresser Rand for $7.6 billion, Merck of Germany’s acquisition of Sigma-Aldrich for $17 billion and SAP’s acquisition of Concur for $8.3 billion. However, this confidence has not carried over to the fourth quarter. Europe and Asia now face fears of an economic slow-down, according to reports.

Check out our infographic for a snapshot on Global Mergers and Acquisitions in 3Q 2014. Click on the image for a closer look.

M&A Update: 3Q 2014

Summer is officially over and we’re ready to get back into the swing of things. If this summer is any indication of M&A for the remainder of the year, we can expect robust deal activity. Typically we see fewer transactions over the summer, particularly in August, but this year we saw $293 billion in global mergers and acquisitions, an increase of 83% when compared to the previous year.

Already, just two days into September, a couple of interesting deals have been announced:

 

 

Burger King and Tim Hortons plan to merge in an $11 billion deal that will create a new fast food powerhouse. The merger has received significant attention from the media, dealmakers, regulators and consumers. Capstone’s infographic will show you what you need to know about this exciting transaction. Click on the image for a closer look.

Burger King Tim Hortons Merger Infographic

Interested in learning more? Read CEO David Braun’s analysis: Burger King – Tim Horton’s Mergeris Unappetizing Deal

Feature Photo Credit: Richard Hsu via Compfight cc

Burger King and Tim Hortons announced on Sunday that they would merge into a single enterprise with $22 billion in revenue and 18,000 restaurants worldwide. A new parent company headquartered in Canada would be created in what technically is a tax inversion, although tax savings are not driving the merger itself. The main strategy is to become more competitive with McDonalds and Yum Brands, the owner of Taco Bell and KFC.

It’s no secret that the quick service restaurant industry is struggling for growth. Consumers are choosing healthier options like Chipotle over traditional fast food restaurants. Consolidation is needed, but I’m not convinced this is a good marriage.

While Burger King and Tim Hortons claim the acquisition will make them more competitive with McDonalds and Yum Brands, how will the combined companies continue to grow? Will they get more purchasing power with suppliers or leverage economies of scale? Yes, the company will have more stores and a bigger bite of the burger, but the fast food market as a whole is shrinking. Tim Hortons was owned by Wendy’s from 1992 to 2006, when it was spun off in an IPO, so how will this transaction be any different from Wendy’s ownership?

If the transaction goes through, branding will be a real challenge.

Burger King is an American fast food burger restaurant founded in Florida, famous for its Whopper. Tim Hortons is a dominant brand in Canada co-founded by Canadian hockey player Tim Horton. The store is well-known for their coffee, donuts, bagels and other breakfast options. Tim Horton (the hockey player) is a well-recognized name in Canada, but I am skeptical that the brand will resonate with Americans.

So will they co-brand? Drop one brand? Create a new brand? Without a single brand it will be hard to contest the dominance of their competitors. But a single brand will come with obvious costs, in the loss of at least one well-known name.

Putting aside my doubts, I brainstormed a couple of ideas:

  • Breakfast for lunch – Tim Hortons could add additional lunch items to its menu and Burger King could add more breakfast and coffee options, leveraging the strengths of each company to provide meals throughout the day.
  • Branded products – Similar to offering an expanded menu, they might choose to offer a smaller selection of well-known branded products at different restaurants, for example, offering Tim Hortons coffee at Burger King.
  • One-stop shop – Burger King and Tim Hortons may function as two restaurants in one building. You could go to one counter for a burger and another counter for a donut. Yum Brands has done that with Taco Bell and Pizza Hut. In fact, this is similar to how some Tim Hortons restaurants operated when owned by Wendy’s.
  • No brand integration – Tim Horton’s and Burger King may remain as separate restaurants with separate brands. This could mean keeping Tim Hortons restaurants concentrated in Canada where it has a strong, recognized brand name, or they might choose to expand both stores geographically.

It will be very interesting to see if this transaction is successful. Fast food restaurants need to change in order to remain profitable, but to me this is an unsavory pairing. If were up to me, I would have imagined something more along the lines of a Dunkin Donuts – Tim Horton’s merger.

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“The danger with a mergers-and-acquisitions boom is that chief executives could allow themselves to get carried away by the thrill of the hunt, reducing their focus on internal investment projects that might have a better chance of bearing fruit,” says the New York Time’s Dealbook column.

M&A activity has reached record highs and shows no signs of slowing. The $2.2 trillion in announced deals globally this year is an increase of 67% over the same period a year ago. This may be good news, but there are accompanying risks.

More mergers and acquisitions typically are a positive sign for the economy, but as activity increases so does the number of failed acquisitions. Executives can make irrational deals driven by excitement or pressure for acquisitions rather than strategy, because cheap capital is available or because others are executing deals.

This year we’ve already seen the failure of a few large acquisitions: Pfizer – AstraZeneca, Fox – Time Warner, Sprint – T-Mobile. Even completed acquisitions still may fall short of expected synergies.  We’ve seen a large number of tax inversions and consolidations, which are primarily driven by cost savings. This is concerning because once you’ve cut costs to become “leaner” and more efficient you have to employ another strategy to grow revenues. I’ve rarely found cost savings to be a strategy for long-term growth.

To further understand this phenomenon of irrational deal-making we can explore the M&A cycle that can be categorized into four phases.

  • Phase 1 – There are few mergers and acquisitions due to sluggish economic conditions.
  • Phase 2 – M&A activity increases as financing is readily available in an improving economy.
  • Phase 3 – Activity is robust: executives feel more confident about the economy and they execute more deals.
  • Phase 4 – The market is frothy and executives start making “dangerous” deals driven more by excitement and momentum than strategy. Premiums can rise to 100% in this final phase.

The excitement from the M&A boom in Phase 3 drives the onset of riskier deals in Phase 4 that are more likely to fail.

It’s natural to be enthusiastic about a deal, but avoid getting swept up in the excitement and acting on impulse without focusing on strategy. Following a proven, systematic process can help you objectively evaluate your M&A opportunities to make sure they are aligned with your growth strategy. I recommend you develop a strategic acquisition plan before you jump into searching for prospects or executing a deal. Using a process will minimize your risks, help you avoid making a bad acquisition, and increase your chances for a successful acquisition.

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Valeant Pharmaceuticals International is determined to grow through acquisitions.  Already actively pursuing a deal with Allergan, the maker of Botox, Valeant is reportedly seeking another contact lens company. CEO Michael Pearson said the company “will not be content to remain the No. 4 global player in the contact lens industry.”

Valeant has a history of acquisitions, and its present structure resulted from the merger of Biovail Corporation and Valeant Pharmaceuticals in 2010.

Over the past year, Valeant has made a number of acquisitions in pharmaceuticals, medical devices, and related fields.

Here are its most recently reported deals:

Valeant Pharmaceutical's recent acquisitions include Bausch & Lomb

Some of Valeant’s more recent acquisitions

Valeant makes about 25 deals each year. Some of them are large, although the majority are too small for financial reporting. This strategy is what I call “taking frequent small bites of the apple,” — in other words, making multiple, smaller acquisitions rather than pursuing only large transformative ones.

With smaller deals you can be more focused in the purpose of your acquisition, which generates results and minimizes risk. Smaller acquisitions can also be easier to integrate once the deal closes.

Once you’ve completed the first acquisition, you can take some time to adjust to your newly merged company. When you’re ready, you can pursue another deal to drive growth.

 

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Here’s a quick thought about the Abbvie – Shire transaction that’s received so much recent attention because of the decision to reincorporate in Ireland once the deal is completed. Tax inversions are in vogue and a hot topic in the media. While the tax benefits of an inversion certainly are important in this acquisition, that’s only half the story. The other side is more strategic.

AbbVie’s top product is Humira, an arthritis drug that will lose its patent in two years. That makes Shire’s portfolio of products very attractive, including its rare disease drugs. The acquisition decreases AbbVie’s reliance on Humira and bolsters its pipeline for future growth.

It was a busy Monday for Mergers & Acquisitions with two big brands announcing consolidations: Zillow will buy Trulia and Dollar Tree will buy Family Dollar. Activity is getting frothy and as I’ve been saying, the sleeping dragon is starting to wake up.

Here’s what you need to know about these transactions:

Zillow to acquire Trulia for $3.5 billion

  • Together Zillow and Trulia will dominate online real estate.
  • Zillow has 83 million users and Trulia has 54 million users, about 61% of the market.
  • Zillow is currently most popular among homeowners while Trulia is popular among sellers.
  • The all-stock deal is expected to generate $100 million in cost savings by 2016.
  • Zillow will pay a price premium of 25%.

Dollar Tree to buy Family Dollar $8.5 billion

  • Earlier this year, activist Carl Icahn pressured Family Dollar to explore selling .
  • Together Dollar Tree and Family Dollar have 13,000 stores in 48 states and Canada and $18 billion in revenue.
  • Family Dollar will be kept a separate brand.
  • $300 million in cost savings are expected by 2018.
  • Dollar Tree will pay a price premium of 23%.

Expect More M&A Activity

M&A activity is hot across many markets, even white hot in some markets like tech enabled healthcare. M&A in the U.S. was up 63% for the first six months of 2014. We’ve seen historically that as large deals take place, this activity starts to trickle down to the middle market and lower market. All signs indicate M&A activity is becoming extremely robust.

If you’re sitting on the sidelines, I recommend you seriously consider acquisition opportunities. Even if you’re not pursuing acquisition, there may be transactions that affect you. Your customers, clients or even competitors could acquire or be acquired. I invite you to join our monthly Capstone webinars to learn practical tips for acquisitions and stay up-to-date on the latest M&A activity:

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M&A activity was on the rise in the first six months of 2014. Global M&A increased 73 percent to $1.77  trillion and  Midmarket M&A increased 18 percent to $399.4 billion.

Check out our infographic for a snapshot on Global Mergers and Acquisitions in 1H 2014. Click on the image for a closer look.

1H 2014 Mergers and Acquisitions

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Mergers have hit a seven year high.  While deal value is up 73 percent, the number of deals has decreased 0.4 percent, according to Reuters data. This confirms what we’ve been seeing since last year: larger, fewer transactions. With mega deals on the rise, we will likely see more activity in the middle market as confidence levels improve and executives become more likely to pursue acquisitions and execute deals.

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