We are in the third quarter of 2016 and deal data is now available through the end of the second quarter. In this report, we review our region’s most active industry sectors and give an outlook for the remainder of 2016.
Outlook across all sectors and the macro drivers of M&A
The business mood in the Midwest and Southern States remains positive. However, since our last report, we had the surprise June vote by Britain to pull out of the European Union. Subsequent to Brexit, investors flocked to the safe haven of U.S. treasures, the dollar strengthened significantly and U.S. exporters, manufacturers in particular, felt the impact. The dollar will likely remain strong for the foreseeable future.
July’s durable goods orders were up 4.4%, buoyed by orders for core capital goods, which coupled with modest gains in inventories is encouraging. However, this follows June’s weaker numbers and core capital goods orders that are 4.3% lower than the first 7 months of 2015. We have seen recent gains in motor vehicles and auto parts, pointing to a strong consumer. Consumer spending jumped 4.2% in the second quarter, but dipped slightly in July, a big month for vacations and often a slower consumer spending month. For 2016 and 2017, all signs point to a continuing strong consumer.
Job growth has been strong in the past few years and is forecast to continue to grow by 150,000 to 200,000 jobs per month, even after August’s disappointing numbers. Interestingly, many people who had left the labor force have since reentered, keeping unemployment around 4.9%. By the end of next year, unemployment is forecast to drop to 4.5%, but between now and then, we have an unprecedented U.S. Presidential election to overcome.
GDP forecasts had previously called for 2% growth in the U.S. for 2016, even as recently as 7 months ago, but GDP only grew at an annualized pace of 1.2% in the second quarter and is now forecast to end the year with 1.4% growth. GDP is forecast to grow around 2% in 2017, on the back of a strong consumer, job and wage gains, in addition to a stronger real estate market and rising home starts.
Core inflation is expected to rise 2.3% this year and 2.4% next year, which may prompt the Federal Reserve to raise interest rates by half a percentage point next year. At the most recent Fed meeting, Janet Yellen even suggested the Federal Reserve may raise rates once this year (December, if at all). The Fed has consistently signaled their desire to raise rates before the next recession, so there is room to cut rates and support the economy in the future. That notwithstanding, rates still remain at historic lows and are unlikely to get close to the “normal” level of 3% at any time in the near future.
Crude oil prices have recovered to a base above $40 and further gains are expected in the next 12 months, but there is still little sign of stronger global demand to reduce the glut of oil storage or lower supply, either of which could support an energy rally.
While most U.S. business owners do not feel that Brexit directly impacted their business outlook, there have undoubtedly been shockwaves through the economy that set us back quite a way.
However, there continues to be demand from both strategic and financial buyers for niche companies that are outperforming their competitors. There is no shortage of cash available for acquisitions; it is a matter of being able to illustrate and prove out a business case for a compelling acquisition.
Analysis by Sector
These 7 industries are also among the most active sectors that drive M&A Activity in our region:
- Construction and Engineering
- Energy: Oil and Gas
- Transportation, Logistics, Distribution
The second quarter of 2016 was one of the slowest for aerospace M&A in recent history; deal volume was down 20% in comparison with the first quarter of the year and represented a continuation of the downward trend since the last quarter of 2015. The sector saw eight deals close compared to 12 in the same quarter last year. Of particular note is the absence of any sizable aircraft and parts transactions in the quarter. These transactions have become increasingly scarce after significant activity in the third quarter of 2015.
The total number of deals declined in the aerospace sector, both for deal values above and below $50 million, declining in the second quarter by approximately 15% from the prior two quarters. Deal values remained relatively consistent with recent quarters (excluding Q3 of 2015), declining in line with volumes between the first and second quarters of 2016.
Public companies remain the most active buyer of aerospace companies in the second quarter, comprising 43% of all announced transactions. As a whole, private equity activity was down when compared to the prior quarter, 18% to 38%. Through the first half of the year, there were 23 divestitures, almost double the previous year, as aerospace companies continue to shed non-core assets. The above notwithstanding, these moderate declines have done little to diminish demand for the right aerospace assets.
2016 is on track to be a record year for M&A in the chemical sector, forecast to be twice as active as 2015.
Chemicals deal volume remained upbeat despite choppy debt markets and the political, regulatory, and global economic uncertainty. With 38 deals in the 2nd quarter of 2016, deal volume continued to recover since the recent low in the 3rd quarter of 2015 (26 deals).
For the first time since 2008/2009, we have had 3 consecutive quarters of strong performance in the chemical sector. Much of this increase in deal value was driven by three mega deals, arguably all tied to the recent turmoil in the global agriculture/farming end market. Bayer’s intended acquisition of Monsanto continued the recent trend of fertilizers and agricultural chemical giants exploring alternatives amid volatile agricultural commodity prices. Together with the pending Dow-DuPont merger and ChemChina-Syngenta transaction, these three mega deals, if completed, would have a profound impact on the fertilizers and agricultural chemicals sector.
The specialty chemicals sector remained the most active sector in terms of deal volume and deal value (if the Bayer-Monsanto transaction is excluded). Two large specialty chemicals deals were announced in the 2nd quarter of 2016: Evonik-Air Products Performance Materials division and BASF-Chemetall.
3. Construction and Engineering
Engineering and construction merger and acquisition deal volume remained unchanged for the 2nd quarter of 2016 when compared to the 1st quarter of 2016, but declined by 6% compared to the 2nd quarter of 2015. The quarter saw 68 deals overall, 19 of which were in the construction materials manufacturing sub-sector, followed by civil engineering and home building with 14 deals each.
The 2nd quarter of 2016 deal value declined by 42% and 34% compared to the 1st quarter of 2016 and the 2nd quarter of 2015, respectively. Construction materials manufacturing and construction, the two largest subsectors in the 2nd quarter of 2016, experienced a decline in deal value both sequentially and annually.
The two largest deals announced in the quarter were Tesla Motor Inc.’s acquisition of Solarcity Corporation and Tangshan Jidong Cement Co Ltd’s acquisition of BBMG Corp-Assets.
While strategic buyers continue to account for the majority of the mergers and acquisitions in engineering and construction, both strategic and financial buyers saw a decrease in deal value this quarter.
4. Energy: Oil and Gas
The oil and gas sector is going through one of the most transformative periods in its history, which will redefine the energy business as we know it.
Merger and acquisition activity in the oil and gas industry rose in the second quarter of 2016, driven by smaller deals in the upstream segment. The majority of the announced deals, 35 out of 50, were in the upstream space – an 84% sequential increase and 94% year-on-year increase. 23 of the 50 were shale transactions.
After driving most of U.S. Energy M&A activity last year, midstream deal activity continued to fall in the second quarter of 2016. There were only 8 announced midstream deals, compared to 11 in the first quarter of 2016, and 21 in the second quarter of 2015.
Most deal makers concentrated on rationalizing their portfolios and generating more cash flow, in response to cash flow constraints and concerns over future access to capital. Divestiture proceeds have been earmarked for reducing debt or reinvesting back into investment opportunities, either via capex or acquisitions.
In the third quarter of 2014, when oil prices were still above $100 per barrel, the supermajors posted aggregate net income of $22.9 billion, according to Bloomberg. Twelve months later, upstream profits had been wiped out. Both international and national oil companies have been negotiating aggressively for discounts from oil-field service providers. In response, companies have been slashing outlays in 2015 and 2016 and some $200 billion worth of projects have been canceled or postponed. Head counts are affected as well, with more than 200,000 employees have been let go in the oil and gas industry, according to recent company announcements.
The number of healthcare transactions increased by 8% in Q2 from Q1 of 2016 and 16% on a year-over-year basis. The quarter saw 239 total deals with Long-Term Care contributing approximately 36%. Overall, this marks the seventh consecutive quarter of deal volume eclipsing 200+ transactions.
The value of deals this quarter increased by nearly 4% compared to the 1st quarter of 2016. However, value decreased by 39% when compared year-over-year. The Physician Medical Groups sub-sector contributed 42% of overall deal value, due in part to the sector’s largest deal – AmSurg Corporation’s merger with Envision Health Holdings.
On the technology side, transaction growth across three sectors, Biotechnology, eHealth and Pharmaceuticals, outpaced the first quarter. The eHealth sector was booming, up 58% versus the first quarter and 68% over the second quarter in 2015. The growing emphasis on benchmarking and population health management, not to mention revenue cycle management and electronic health records, should keep this sector growing for several more quarters.
On August 22nd, Pfizer Inc. and Medivation, Inc. announced that they have entered into a definitive merger agreement under which Pfizer will acquire Medivation, a biopharmaceutical company focused on developing and commercializing small molecules for oncology. If this deal goes through, the third quarter M&A activity will be buoyed by this deal.
The Institute of Supply Management’s Manufacturing Index (ISM) had hit its highest level in 16 months at 53.2 in June, then 52.6 in July and a slight contraction to 49.4 in August. A measure above 50 for the index indicates that manufacturing activity in the U.S. is expanding. The index had been rising since the beginning of this year when it hit a two-year low of 48.0.
U.S. Manufacturers have been impacted by Brexit and the strength of the dollar. However, a recent ISM survey showed a strong majority believe that the Brexit will have a negligible impact on their business strategy. With many U.S. Manufacturers focused on the domestic market, global economic uncertainty should have minimal effect on domestic manufacturing. One of the key drivers of manufacturing growth has been the strength of the U.S. consumer. With consumer confidence and consumer spending remaining high in the U.S., the outlook for U.S. manufacturers remains positive.
The latest National Association of Manufacturers (NAM) quarterly survey continued to reflect concerns over economic challenges, but was also encouraging. In this survey, 61.7 percent of manufacturers are either somewhat or very positive about their own company’s outlook, up from 56.6 percent who said the same thing in March. It also ends a five-quarter slide in confidence, down from 91.2 percent in the fourth quarter of 2014.
Outside of the largest deals, the value of transactions declined in the first half of 2016, compared to a year earlier. Industrial manufacturing M&A deal value decreased by 15% for the first half of 2016, compared to the first half of 2015. Seller valuation expectations have been increasing, which contributed to a slower first half of the year.
7. Transportation, Logistics, Distribution
With the announcement of over 50 global transportation and logistics M&A deals in Q2 2016, the sector reported its third highest quarter by aggregate value of the last three years, exceeding Q1 2016 by over 20%.
The uptick in activity was diversified across subsectors, with aggregate value increases in logistics, trucking, passenger ground and passenger air.
Transportation, logistics and distribution deal volume and value grew by 6% and 20%, respectively, in the quarter as compared to Q1 2016. However, they declined by 18% and 22%, as compared to Q2 2015.
Logistics has been positively impacted by ecommerce, which was up 8% year over year. Warehousing and storage space has also seen vacancies decline to their lowest levels since 2000.
There are increasing investments in warehouse management systems (especially in light of larger, higher occupancy warehouses), transportation management systems and automation software. Increasing investments can be seen in inventory management systems, transportation management and automation systems, as companies look to increase efficiencies. M&A activity follows investment.
According to the American Trucking Associations (ATA), 81 percent of the total revenue seen in the shipping sector was attributable to trucking companies. Generally viewed as a barometer of U.S. economic health, the outlook for the remainder of 2016 is mostly dependent on manufacturing and industrial expansion, which has been a significant contributor to the trucking industry’s growth in the past several years. A continuing shortage of qualified applicants for trucking jobs may contribute to carriers raising prices. In the next 8 years, the approximate 50,000 driver shortfall is forecast to surge to more than three times the current shortfall, according to the ATA.
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 preparation and sale process, to remove obstacles to close a transaction and ensure only the best prospective buyers make it to the closing table, with the capital and commitment to close a transaction.
The leading strategic buyers demand professionally prepared data and analysis by 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 our business owner clients to help them make better strategic decisions, providing an outsourced team of industry-leading professionals. We consistently compete on a national scale and have a strong track record of success. Our clients benefit from decades of transaction experience, discrete and effective representation in the sale of their private company.
ClearRidge is the most active M&A firm in our region and has been recognized for the quality of our work and success at managing and arranging transactions for our clients’ companies. For further information on our team, industry expertise and transactions history, please visit www.ClearRidgeCapital.com.
Sources: This report has been compiled from reports and research including federal data, independent analysis, Kiplinger, PricewaterhouseCoopers, Janes, Deloitte, Bain and Company, Oil and Gas 360, SDR Ventures, Baker Hughes, McLean Group, ATKearney, Healthcare M&A information Source, Levin Associates, Business Wire, National Association of Manufacturers, Road Scholar Transport and other sources cited in the text.
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.