According to a survey by KPMG LLP, the U.S. audit, tax and advisory firm, merger and acquisition (M&A) activity is expected to remain solid throughout 2014. Of the more than 1,000 M&A professionals, investors and advisors who participated in the survey, 63 percent anticipate that their U.S. companies or clients will initiate at least one acquisition in 2014. Thirty-six percent of respondents expect that their companies or clients will complete a divestiture in 2014.
“We’ve seen a shift in the marketplace from when companies divested non-core assets as a result of the economic downturn to today, pursuing inorganic growth. With favorable conditions in place for increased M&A activity, such as significant cash on corporate balance sheets, more confidence in the overall economy, and continued low interest rates, expanding core business functions through acquisitions is an appealing strategy for organizations,” according to Dan Tiemann, KPMG’s Transactions & Restructuring lead for the Americas.
Among the 145 C-level executives surveyed, nearly three-quarters anticipate their company will make an acquisition in 2014, compared to approximately half in 2013.
The leading catalyst for deals in 2014 will be large cash reserves, according to one quarter of respondents, followed by opportunities in emerging markets (17 percent), improved consumer confidence (16 percent) and availability of favorable credit terms (16 percent). Respondents were also divided on their primary reasons for making an acquisition in 2014, with 18 percent citing availability of opportunities and targets, 17 percent indicating they would be seeking to expand their footprint in new geographies, 17 percent expanding their customer base, and 14 percent entering new lines of business.
“While uncertainty in the regulatory environment remains one of the biggest challenges facing PE firms, the PE market is in growth mode. Firms are looking to expand into new markets and lines of business. Given the amount of capital available and dry powder that must be spent, 2014 could be a very active year,” said Marc Moyers, national sector leader, Private Equity, KPMG LLP.
The United States is expected to experience the highest level of M&A activity in 2014, cited by 56 percent of survey participants. Western Europe (29 percent) and China (29 percent) will also have active M&A markets, according to the survey, followed by North America overall with 27 percent, Asia with 15 percent (excluding China) and Brazil with 10 percent.
“In today’s volatile economic environment, the perceived safety of the North America market continues to attract investment dollars from both U.S. and global companies looking for predictable growth. The European debt crisis has also created opportunities for companies seeking to gain exposure internationally and grow their global footprint.” said Phil Isom, head of KPMG Corporate Finance LLC.
Financing Smaller Deals to Dominate in 2014
Survey participants indicated there will be very few megadeals in 2014, with middle-market deals dominating M&A in 2014. Seventy-seven percent of respondents expect their respective deal activity will be valued under $250 million, followed by 12 percent who anticipate their acquisitions will be valued between $250 and $499 million, and five percent between $500 and $999 million.
According to the survey, the most important factor for deal success is a well-executed integration plan (38 percent), achieving an appropriate valuation/deal price (29 percent), and effective due diligence (20 percent).
Thirty-nine percent of survey participants expressed uncertainty about accessing the credit markets in 2014 in order to finance deals, compared with 36 percent who were optimistic regarding accessing credit markets. “Even though indicators of global economic improvement are evident, smaller deals remain easier to finance and integrate,” said Isom.
Sector Highlights
According to the survey, in 2014 the industries expected to have the most M&A activity are technology/media/telecommunications (44 percent of respondents), healthcare/pharmaceuticals/life sciences (41 percent), financial services (28 percent), and energy (27 percent). Consumer markets were cited by 21 percent, and the diversified industrials sector was cited by 18 percent.
The top M&A challenge cited by respondents in the consumer markets, diversified industrials, and technology /media/telecommunications sectors will be valuation disparity between buyers and sellers. For both financial services and healthcare/pharmaceuticals/life sciences, the top challenge cited was uncertainty in the regulatory environment. The energy sector was closely divided, with the uncertain regulatory environment serving as the leading challenge, followed closely by valuation disparity.
To read the full KPMG press release, click here.