M&A and capital markets update - Fourth quarter 2014

2014 US middle-market M&A activity rebounded strongly from the prior year, with increases in both deal volume and deal value. Trending throughout the year was a higher number of bolt-on acquisitions by strategic corporate investors, in order to extend their current portfolios or reach new areas of growth. The largest US transaction in Q4 belongs to the life sciences sector with Actavis’ white night bid for Allergan for $66 billion. On the contrary, the energy sector is starting to lose some steam due to a sharp decline in oil prices. As the shale boom attracted a flood of investors that expected oil prices to remain high, we could see a wave of distressed asset sales in 2015 if oil prices remain at low levels. The overall global economy experienced a moderate expansion of roughly 3 percent, and equity markets were also favorable with the five major indices posting an average gain of 4 percent. As credit and equity markets remain supportive, we expect the M&A market to remain strong into 2015.

US middle-market M&A activity3,406 deals

2014 – Q4 M&A and capital markets metrics

US middle-market M&A enterprise value9.2x
Cash and short-term investments of S&P 500$1,246 billion
Private equity capital raised$62 billion

US middle-market M&A activity increased from prior year levels, with deal count increasing 14 percent over prior year to 3,406. Deal value also saw positive results, jumping 17 percent to $382 billion. The number of deals is below the highs we saw in the 2010–2012 time period due mainly to a shortage of good companies for sale. We remain optimistic that strong M&A activity will continue in 2015.

US middle-market M&A activity

Valuations for US middle-market companies remained strong throughout 2014, with median EBITDA transaction multiples closing in at 9.2x. This represents a 10 percent increase in valuations from the prior year. Increased valuations are being driven by the low interest rates, accommodative credit policies, and an imbalance between supply and demand for quality companies. Given favorable market conditions, we expect valuations to remain high going into 2015.

US middle-market M&A enterprise value

Cash and short-term investments balances remain high for S&P 500 companies, only slightly decreasing from 2013 by 1.3 percent to $1.25 trillion (excluding financials). The decrease in cash balances is largely due to an increase in capital expenditures, stock buybacks, and acquisition activity. Strategic investing activity is expected to remain strong in 2015 as corporates look to divest non-core assets while acquiring more strategic targets to assist with meeting Wall Street’s growth expectations.

Cash and short-term Investments of S&P 500 (in billions)

2014 marked another successful year for private equity (PE) deal activity. Both deal volume and value reached historically high levels as PE firms continue to deploy record levels of capital and take advantage of favorable financing markets. Limited partners continued to favor the PE asset class, with another $189 billion in funds raised over 283 funds. As current market conditions remain conducive to deal making, we expect 2015 to be another robust year for PE activity.

US private equity deal flow

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