Six Industries Primed for M&A Activity in 2016

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1 January Six Follow Industries on head Primed on Master for M&A page Activity A in 2016 January 2016 Six Industries Primed for M&A Activity in 2016 By Edward Rivera IBISWorld expects the M&A market to be positive, despite some of the challenges that executives will face over the year The healthcare sector was the most active participant in M&A transactions over the first half of 2015 At a nominal level, the dollar value of mergers and acquisitions (M&A) deals in 2015 is set to be the highest ever recorded globally. In the United States, amidst an improving economy, the easy access to low-cost debt and a general push toward more efficient, and hence more profitable operations, have been cited as contributors to the breakneck pace of By September, announced deal volume had reached a record high, and by December, total value exceeded $4.0 trillion. In 2016, IBISWorld expects the M&A market to be positive, despite some of the challenges that executives will face over the year. In particular, a recent survey conducted by Ernst & Young (EY) found that volatile currencies and commodities and restraint earnings in a low-growth economy are heavily considered in today s transactions. Using information from over 1,000 industries within its database of reports, IBISWorld has identified six industries primed for high levels of M&A activity in 2016 across three sectors. The healthcare sector was the most active participant in M&A transactions over the first half of In what some are saying is a response to healthcare reform, hospitals and health insurance providers alike are undergoing consolidation to reduce costs, innovate payment systems and move toward a more value-based care system. Meanwhile, in the chemical manufacturing sector, large deals are set to push the industry to further consolidation. In particular, the desire for increased capacity is resulting in a shift toward low-cost production through acquisitions. Lastly, the banking sector has undergone several shifts in response to higher levels of regulations following the financial crisis. As the regulatory environment begins to settle in 2016, still-low interest rates and subsequent profitability issues are likely to create some headwinds for the sector, which will likely lead to M&A activity over the year. Healthcare sector The healthcare sector is one of the most active regarding M&A activity in the United States. In the first half of 2015, the sector represented 25.2% of the total value of announced deals; this was enough to make it the largest segment at the time. Industries in the healthcare sector have traditionally remained fragmented and separate from one another. However, in the midst of profound regulatory changes, mainly driven by the implementation of the Patient Protection and Affordable Care info@ibisworld.com

2 January Act, sector operators are scrambling to adjust. In the five years to 2016, deferral funding for Medicare and Medicaid has grown at an anticipated average annual rate of 4.3%. In particular, a tightened reimbursement environment is making it difficult for operators in the $1.0 trillion US Hospitals industry (IBISWorld report 62211). In general, hospitals are consolidating to reduce costs by gaining better negotiating power with suppliers and payers. This is perceived as necessary given that purchases account for just over 30.0% of the industry s nonwage related costs. Moreover, reimbursement from government programs has grown at a slow pace, and therefore, hospitals have increasingly sought favorable contracts with nongovernment payers, including health maintenance organizations, preferred provider organizations and other managed-care plans. As a sign of increased consolidation over the coming years, the number of industry establishments per enterprise is expected to climb at an annualized 2.3% over the five years to Similarly, the Health and Medical Insurance industry (IBISWorld report 52411b) has recently undergone consolidation and cross-industry M&A activity to improve their operations. As a result, in 2016, the number of industry enterprises is projected to fall 0.6%, while establishment figures grow 1.6%, according to IBISWorld data. Although regulation remains a vital catalyst for insurance providers, many believe that recent M&A activity present a shift toward more vertical structures and highlights a natural shift toward a more consumerist approach to healthcare. By localizing healthcare systems and combining technologies, data-systems and personnel, both hospitals and health and medical insurance providers hope to move toward a value-based model with increased market presence and $ billion Federal funding for Medicare and Medicaid some costs reductions. For example, Aetna (accounting for 8.3% market share in the Health and Medical Insurance industry) agreed to buy Humana (7.5% market share), while Allina Health (a network of hospitals) agreed to acquire the healthcare dataanalysis company, Health Catalyst. Moving forward, healthcare valuations will likely remain strong as demand for M&A deals at high prices remains. Chemical manufacturing sector The chemical manufacturing sector has exhibited M&A value increases over As a sector, revenue growth accelerated in 2015, despite a stronger dollar hampering exports and generally weak demand from international markets. This growth is largely explained by the expansion of key US end-markets, such as automobiles and housing. In 2016, growth should be even higher as better economic conditions are met with stronger global and domestic demand from end-markets. This increased demand for chemical products will necessitate increased capacity by US chemical product manufacturers, which will likely be provided through M&A activity. This has been one of the chief motivations behind DuPont s acquisition of Taxon Biosciences Inc. in April of By

3 January leveraging the acquired company s biological solutions to their in-house agriculture business, DuPont wishes to increase its capacity and transition toward more value-added products. One industry in the chemical sector set to benefit from 2016 M&A is the US Organic Chemical Manufacturing industry (IBISWorld report 32519), which is poised to experience 5.2% growth in revenue over the year. This success is largely the result of growth in downstream markets such as plastic and paint production. Furthermore, in 2016, the industry will exhibit healthy profit margins mainly due to low capital costs and growth in downstream markets. To meet increased demand for industry products, operators will have to increase capacity. With wider profit margins and more cash on hand, industry operators will likely seek to acquire other companies. The same can be said for the US Dye and Pigment Manufacturing industry (IBISWorld report 32513), with its industry revenue expected to grow 4.0% in The industry is classified by IBISWorld as highly competitive due to its high levels of price-based competition, particularly against low-cost imports from Asia. As demand for industry products from the automotive sector and the housing sector (both of which are large consumers of industry products) increases, operators are expected to consolidate in order to limit their exposure to this price-based competition; moreover, they will lower production costs through economies of scale, while also increasing their capacity to produce. Banking sector The overall financial services sector was one of the smaller sectors regarding M&A value in the first half of 2015; however, its growth relative to 2014 is astounding. Over the first half of the year, the sector represented just 4.6% of the total dollar value of announced deals; this, however, marked a 404.0% increase from This massive spike in M&A activity is the result of long-standing players across multiple spaces, including the banks, exiting the sector due to increased regulatory pressures and low-growth environments. In banking especially, still-low interest rates and the increased costs of new regulations compliance will likely continue pressuring sector profitability, which IBISWorld expects will result in increased M&A activity among small to medium businesses as larger banks may actually divest to avoid additional regulation. Even with the recent announcement of an interest rate New car sales 18 Housing starts 1200 Number of vehicles (millions) Units (thousands)

4 January About IBISWorld Inc. Recognized as the nation s most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of unique information and analysis on every US industry. With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions. Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide. For more information, visit or call rise, the first since 2006, profitability will continue suffering in the short run as rate hikes are typically slow and incremental. In the US Savings Banks and Thrifts industry (IBISWorld report 52212), the total number of enterprises is expected to fall 0.6% over This may not seem like much of a decrease, but the industry has experienced, on average, an enterprise decline of 2.0% per year over the five years to Much of this decline can be attributed to the increased costs of compliance, such as capital standards and increased reporting requirements. Similarly, despite anticipated revenue growth of 7.4% in 2016, commercial bank enterprises are still expected to Number of enterprises in the Savings Banks and Thrifts industry Enterprises continue exiting the industry due to increased regulatory costs. Although enterprise decline is not a definitive sign of a consolidating sector, it highlights the troubled operating environment that industry companies face. As the full extent of postrecessionary regulation becomes known, banking companies will begin to focus on regulation compliance. During this period, operators will seek to merge or acquire other companies to reduce these regulatory costs in the struggling sector, while still providing the benefit of technology transfers and scale. As some operators leave segments of the banking sector, sales of their units will bolster acquisition activity. Number of enterprises in the Commercial Banks industry Enterprises Contact: Media Relations media@ibisworld.com IBISWorld Sales & Subscriptions Phone:

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