M&AIndexQ Growth is back on the corporate agenda. The Deloitte. Contacts. Key points

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1 The Deloitte M&AIndex 214 Growth is back on the corporate agenda Contacts Key points Deloitte forecasts a strong resurgence in deal volumes for 214, bolstered by strong economic figures from the US and Europe. We expect the global deal volumes to reach nearly 8, deals by the end of 214, up by 1% for the same period in 2. More than $5 billion worth of deals were announced just in the first two months of 214. It appears growth is firmly back on the corporate agenda. The S&P 12 share price index currently stands close to its pre crisis high, however revenue growth has been declining since 212. With confidence levels recovering, M&A activity provides a compelling way to enhance revenues and profits. Iain Macmillan Head of UK M&A imacmillan@deloitte.co.uk Sriram Prakash Head of M&A Insight sprakash@deloitte.co.uk > Figure 1. The Deloitte M&A Index Global M&A deal volumes 9,5 9, 8,5 8, 7,5 214 M&A deal forecast , 6,5 6, 5,5 5, Q3 21 Q Q3 211 Q Q3 212 Q Q3 2 Q Quarter Deloitte M&A Index (projection) Actual M&A deal volume (actuals) 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 9 per cent dating back to 28.

2 2 Deloitte M&A Index 214 Factors influencing M&A The Deloitte M&A Index has highlighted a number of variables that impact M&A deal volumes: Policy uncertainty falls Corporate sector fundamentals are strong, however economic uncertainty over the last few years significantly dampened corporate risk appetite. In the previous editions of the Deloitte M&A Index we argued that until market sentiment improves, companies would not take on greater risk. On the policy front, there have been a number of positive developments such as the US deal on debt ceiling, decisive actions by EU leaders to manage the Euro crisis and the UK avoiding a double dip recession. Policy uncertainty was one of the variables that strongly featured in our 214 projection calculations. There is an inverse relationship between macroeconomic policy uncertainty and M&A volumes. In recent months, policy uncertainty has been falling steadily and if this continues, we can expect an uptick in M&A volumes in the coming quarters. IPO markets are booming The recent boom in the global IPO market is a strong indicator of increasing market confidence. In 214 IPO levels reached 4 per cent of total for 2. If this trend continues, we can expect a record year for IPOs. While technology IPOs have grabbed the headlines, it is encouraging that in 2 IPO listings were spread across a number of sectors, suggesting that growth prospects are well distributed across the economy. According to Dealogic, 2 was the most active year in recent record for Private Equity (PE) backed IPOs. There were 182 PE backed IPOs that raised a total of $56.4 billion. With successful exits underway, we expect Private Equity to start investing some of its record levels of dry powder, which Preqin estimates currently stands at $1.67 trillion. Figure 2. Global policy uncertainty ( ) Index Q3 27 Q Q3 28 Q Q3 29 Q Q3 21 Q Q3 211 Q Q3 212 Q Q3 2 Q4 214 Weighted Index M&A Deals Quarter Source: Policyuncertainty.com, Thomson M&A, Deloitte analysis *Weighted index is a weighted score for US, Europe and Chinese uncertainty index. Figure 3. Global IPO volume and issuance (US$bn) ( ) Volume 1,4 1,2 1, Q3 Sum of Proceeds 29 Q Q3 21 Q4 211 Count of Issuer Q3 211 Q4 Quarter Q3 212 Q Q3 M&A Deals 12, 1, 8, 6, 4, 2, IPO issuance (US$bn) 2 Q Note: 214 data as at 18 March, 214 Source: Thomson Reuters, Deloitte analysis

3 Deloitte M&A Index Factors influencing M&A Pressure on revenue growth The S&P 12 share price index currently stands close to its pre crisis high; however revenue growth has been declining since 212 at a rate of 3%. Companies will be under pressure to maintain their share price performance. At the same time, S&P 12 non-financial companies are sitting on record piles of cash and the net debt to EBITDA ratio for US and European companies is 18% and 8% below their 1 year average respectively. With confidence levels recovering, M&A activity provides a compelling way to enhance revenues. Figure 4. Corporate revenue growth rate vs. share price index (S&P 12) S&P 12 index 2, 1,8 1,6 1,4 1,2 1, Revenue Growth Rate (%) Year YoY Revenue Growth Rate (%) S&P 12 index Changes to the political landscape could influence corporate risk and investment appetite With 21 general elections coming up in 214, we expect changes to the political landscape may have an impact on corporate risk and investment appetite. Major elections include ones in the key emerging markets of India and Brazil, congressional elections in the US, parliamentary elections in EU and the Scottish referendum. Figure 5. Global political scenario 214 General elections due in 214. Cases of social unrest and emerging crisis. Global Crisis/Social Unrest Ukrainian crisis Social unrest in Turkey, Egypt, Libya, Syria, Argentina Major Elections Europe Belgium, Hungary, Georgia, Romania, Slovakia, Sweden, Moldova, Lithuania, Turkey, EU Elections Americas US Congressional, Brazil, Columbia, Uruguay Asia Pacific India, Indonesia, Bangladesh, Fiji, New Zealand Africa South Africa, Libya Source: Deloitte analysis

4 4 Deloitte M&A Index 214 Corporate barometer We observed two significant changes in S&P 12 company fundamentals. First there was a sharp decline in average revenue growth, which fell by 4.3% year on year in Q4 2. This was partly due to the severe weather conditions in the US which resulted in unused inventories. Figure 6. Company fundamentals (S&P Global 12) (Q3 2 vs. Q4 2 average) Average Cash in Hand (US$bn) Average EPS Second, average cash in hand fell from $6.2 billion to $5.3 billion. Some of the cash was spent on M&A. Global deals in Q4 2 amounted to $521 billion. YoY Average revenue growth Average dividend paid (US$m) Companies also increased their average capital expenditure from $455 million to $492 million, suggesting a more positive investment outlook and confidence in their balance sheet strength. Average capital expenditure (US$m) Average FCFF (US$m) Q3 2 average Q4 2 average

5 Deloitte M&A Index Geographies The US continues to lead the resurgence Industrial production in February 214 grew at the fastest rate in six months a positive sign business investment may take off in 214. Figure 7. Global cash holding pattern as per geographies** US$ million 3,5 3, US companies in S&P 12 are sitting on reserves of $1.53 trillion, which is 51% of the total cash reserves of the index constituents. 2,5 2, US companies have started to become more active in global M&A markets. In 214, they were involved in 38% of all global M&A transactions up from 34% in Q4 2. 1,5 1, * Year Asia-Pacific Europe North America South America **Includes S&P 12 non-financial companies *2 figures are for the companies which have reported as of date of publication. An unexpected rebound in European deals European companies were involved in 35% of all global deals by disclosed values in 214, which is up from 27% during same period in 2. This trend is consistent with the 15% drop in cash reserves of the European companies from $97 billion to $822 billion. Figure 8. Region-wise M&A values 2 vs. 214 % of share of global deal values US Europe Asia-Pacific 6 4 South America 1 1 MEA Source: Thomson Reuters, Deloitte analysis Note: This data set includes all deals where a company from a particular geography was involved either as a buyer or seller. 214 figures are based on figures disclosed as of date of publication.

6 6 Deloitte M&A Index 214 Sectors We expect M&A activities to be strong in the following sectors: Technology, Media & Telecommunications (TMT) sector Technology, Media and Telecommunications companies are at the forefront of M&A activities. The ongoing revolution in media consumption habits is likely to fuel convergence inspired mergers. We expect both vertical and cross industry convergence deals. Successful mergers could create whole new market categories. Figure 9. Deal values 2 vs. 214 US$ billion TMT Pharmaceuticals and Life Sciences Industrials & Chemicals Energy, Mining & Utilities Consumer Business Source: Mergermarket, Deloitte analysis *Deal values for 214 based on deals disclosed as of date of publication. Pharmaceuticals and Life Sciences Pharmaceutical and Life Sciences companies are once again under pressure due to weak R&D pipelines. Indeed for some companies replenishing their pipelines is now a matter of survival. Historically they have responded through acquisitions and we expect this trend to continue with bolt on deals, rather than block busters. We also expect them to divest non core assets to free up cash for pipeline related acquisitions. Figure 1. Average PE valuations as per sectors 2 Average PE Manufacturing 21 Real Estate Professional Services Technology Media Life Sciences E&R Consumer Business Telecom Average PE previous 1 years (23-212) Overvalued Undervalued Source: Thomson M&A, Deloitte analysis *Bubble size denotes the deal volumes

7 Deloitte M&A Index Charts we like Figure 11. Growth prospects in major economies Figure 12. Cash position S&P 12 sectors 2 US$ billion , 2,5 2, 1,5 1, 6 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 14 Feb 14 Mar UK Euro Area US BRICS *Consensus forecasts for 214 GDP growth, March 2 = 1 Source: Economics & Markets, Deloitte Research TMT Energy & Resources Manufacturing Consumer business Life Sciences Figure. S&P 12 buybacks vs. dividends (2-2) US$ million Figure 14. S&P 12 short vs. long term debt % 7, 7 6, 5, 4, 3, 2, 1, Widening Gap Buybacks Dividends Long term debt as % of total debt Short term debt as % of total debt Figure 15. S&P 12 M&A spend as % of market capitalisation % Figure 16. Average deal P/E multiples vs. average deal premium (%) (21-2) Premium % PE (x) United States Europe Average Valuation (P/E) (RHS) Average Deal Premium (LHS) Source: Thomson Reuters, Deloitte analysis

8 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 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 S&P 12 company fundamentals Valuations trends 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 9 per cent dating back to 28. 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 from the Deloitte M&A Insight team, based in London, UK. Ravi Sekar, Haranath Sriyapureddy, and Abhimanyu Yadav are M&A analysts in the Business Research Center, at Deloitte (DTTL) in India. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ( DTTL ), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. 214 Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC33675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 () Fax: +44 () Designed and produced by The Creative Studio at Deloitte, London. 3482A