Studies: Deal Mania Will Continue

Private equity represented 30 percent of U.S. deal value in the second quarter, a level not seen in over 10 years.
Stephen TaubJuly 17, 2006

Thanks to record cash levels at corporations and private equity firms, plenty of available financing, and historically low levels of distressed debt, merger and acquisition activity remains at a six year high, according to a new study from the Transaction Services Group of PricewaterhouseCoopers.

As private equity firms continue to swell in size, they are playing an increasingly influential role in U.S. mergers. PwC found that private equity represented 30 percent of U.S. deal value in the second quarter, a level not seen in over 10 years. In fact, during the late 1990s, private equity’s share rose above 20 percent only once, and generally averaged between 10 percent and 15 percent, according to the report.

PwC also expects to see large deals in general. The authors emphasized that, “2006 will be a record year for buyout size, while corporate acquirers are prepared to bid higher to get the assets they feel they need to maintain growth and support their stock prices.”

Meanwhile, a separate study by The Zephyr Predator Index, which measures cross-border deal activity, found that for the first six months of 2006, completed acquisitions of U.S. companies by non-U.S. entities increased 69 percent year-over-year to $90 billion, versus $53 billion in 2005. At the current pace, foreign takeovers in 2006 could easily exceed last year’s level of $137 billion, noted the Zephyr report.

Looking at sector activity, PwC singled out five industries that are well positioned to take advantage of M&A opportunities: Energy, manufacturing, utilities, digital convergence (driving technology deals), and retail.

The PwC study said that the energy sector will remain active because continued high oil and gas prices make many initiatives economically feasible for both corporate and private equity acquirers. “After three years of unprecedented returns [in the energy industry] and the biggest stock buybacks in history, reinvestment levels as a percent of cash flow are moving up, and major companies—especially the big independents—are turning to M&A to increase their inventory of big projects,” elaborated the study authors.

M&A motivation is a bit different for the manufacturer sector. PwC said manufacturers are feeling the stress of both high commodity prices and significant pressure to hold down prices for large box retailer and industrial customers. “They’ve done about all they can to lower costs through efficiency improvements and lean manufacturing,” said the report. “But at some point, they’ll be under more pressure to realign capacity, move even more production offshore, and consolidate market share.”

Digital convergence will spark technology company consolidation, said study authors. Digital convergence is defined as the effort to bring together computer, phone, recording, and broadcast technologies to enable new, flexible uses of products and services within an all-digital environment.

“Companies are under pressure to gain footholds in digitally related markets, and are willing to spend considerable sums on M&A to reach their convergence goals,” PwC noted. As a result, software developers are most likely to benefit from[the digital convergence trend, followed by business information content developers, wireless companies, entertainment companies, and electronic device makers,” concludes the report.