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IntraLinks Deal Flow IndicatorOur quarterly review of trends in the global M&A market
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CONTENTS
Introduction 2
Overview 3
Regional Snapshots 8
North America 8
EMEA 9
Asia Pacific 10
Latin America 11
UK Spotlight 12
Guest Comment 14
Industry Indicators 16
About the IntraLinks DFI 17
IntraLinks Contacts 18
IntroductionWelcome to the Q2 2012 IntraLinks Deal Flow Indicator (DFI) Report brought to you in association with Remark, The Mergermarket Group’s research and publications unit. The DFI tracks sell-side M&A mandates and deals reaching due diligence across the world, providing us with a unique leading indicator of deal flow in the global M&A market.
The number of deals announced in the first three quarters of 2012 has declined by 16% against the same period last year, reflecting the lack of confidence that has undermined the market since the eurozone crisis erupted last summer. Yet the trends we are seeing in early-stage M&A due diligence activity may be cause for optimism.
Indeed, the DFI shows that, in Q2 2012, the level of due diligence activity taking place in virtual data rooms rose more than twenty percent in both year-on-year and quarter-on-quarter terms. This indicates that the market dip could soon be reaching an inflection point.
These encouraging figures can be attributed, at least in part, to crisis fatigue. Businesses that have successfully navigated the past year’s volatility are realising they cannot put their M&A plans on hold indefinitely. While deal makers will undoubtedly proceed with caution – scrutinising opportunities with more rigour and risk-aversion than before – they will also be mindful of their competitors’ M&A growth plans.
IntraLinks has been a leading global provider of virtual data rooms for over ten years, and our involvement in the early stages of M&A deals allows us to keep a finger on the pulse of today’s rapidly changing M&A market.
Deal Flow Indicator Q2 2012 Video
Matt Porzio, Vice President of Product Marketing
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Trends in global volume of deals reaching due diligence
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OverviewThe global M&A market may experience an upturn in the next three to six months, according to our latest DFI figures.
At the midpoint of last year, the worsening eurozone crisis stymied deal activity. But the market began to turn a corner in Q2 2012, with the DFI reaching a peak quarterly level at 173% of Q1 2008 deal volume – a year that is widely viewed as the unofficial beginning of the financial crisis, or at least the end of the buyout boom.
On a quarter-on-quarter (QoQ) basis, the DFI rose by 21% – the fastest increase since Q2 2011 and far above the average growth rate of 1% over the preceding nine months.
Casting a look at longer term DFI activity, the figures paint an equally optimistic picture: the year-on-year (YoY) figures for prospective deal activity rose by 23%, while the trailing 12 month aggregate deal volume rose by 22%.
By any of the above measures, we are seeing a substantial amount of potential activity bubbling below the surface that could materialise in Q3 and Q4.
There are a range of factors that could be underpinning this growth in activity. Some companies may be seeking to divest themselves of non-core operations in order to focus on core operations, and others may view M&A as the best way to access fast-growing markets.
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Overview (continued)This latter trend is especially apparent in the consumer sector, a prime example being AB InBev, which struck a US$20.1bn deal to acquire the outstanding shares in Mexican brewery Grupo Modelo SAB (the 49.7% of the businesses InBev does not already own) at a 30% premium to the target’s share price. The deal expands InBev’s footprint in the Mexican market and could yield US$600m in synergistic cost savings within four years.
Due diligence volume may also be boosted by smaller bolt-on buys aimed at growing particular product and service offerings. This strategy is stimulating mid-market activity across the board.
Of course, there may also be a fair share of continued M&A activity aimed at scaling back rather than expanding. Indeed, many larger firms have shifted their focus to non-core asset sales in an attempt to streamline their business and improve core competencies.
A case in point is the sale of Pfizer’s infant nutrition unit. The US$11.9bn deal, announced in Q2, signalled a move away from non-core areas and a concerted re-focus on its pharmaceutical operations.
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geVOLUME UP 22% YoY
2011 2012
Download/listen to our podcast
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Overview (continued)Strategic consolidators and buyout houses are keeping a watchful eye on quality assets coming to market at attractive prices. Many private equity-backed businesses are ripe for exits. With share prices hit by global economic uncertainty, illustrated by slides in most major market indices, public companies can also be acquired at attractive valuations. This leaves an enormous window of opportunity for buyers with financial firepower to acquire high quality assets.
“Deals are getting to market for many of the same reasons that we’ve heard in the past,” says Matt Porzio. “But this is all being tempered by the after effects of the global financial crisis, including a slowdown in growth, the European sovereign debt crisis and the continuing difficulties of many financial institutions,” he adds.
In addition, gaps between buyer-seller price expectations and increased scrutiny of corporate boards on the part of shareholders means deals will undergo more rigorous due diligence prior to announcement.
The worldwide M&A market has indeed seen a downward shift in activity since the eurozone crisis erupted last summer. But with public companies under pressure to put cash to work, and PE firms under pressure to deploy (or otherwise return) previously raised funds, M&A could rise even if a silver bullet resolution to eurozone woes seems elusive. In the EMEA region – the epicentre of the eurozone crisis – the DFI rose more than one-fifth in both QoQ and YoY terms in Q2 2012. Following a flat period, this sharp quarterly growth suggests the deal market may soon hit the inflection point heralding recovery.
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Video and web cast linkHow to locate your next deal
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From a sector perspective, manufacturing/industrial was by far the busiest sector for M&A, representing 27% of total volume, followed by the energy sector with 16%. Both of these sectors were among the fastest growing sectors QoQ, according to the DFI.
“China and other fast-growth markets are buying upstream to satisfy their future energy requirements, which is driving deals in the sector,” says Philip Whitchelo, VP of Product Marketing, EMEA & APAC, for IntraLinks. Indeed, state-owned Chinese energy firm CNOOC recently announced it would acquire Nexen, the Canadian energy producer, in a US$17.7bn transaction.
Overall, these trends show that buyers are coming back to the market, albeit with a far more selective and cautious approach following months of economic volatility. In the remainder of the year buyers will be covering all their bases by conducting water-tight due diligence to minimise risks before buying assets in uncertain times.
“ Cash-rich corporates, private equity firms with money and cheap financing from North America are factors to consider when looking at the North American DFI.”
Matt Porzio, Vice President of Product Marketing
Real Estate & Leisure
Telecomms/Media/Entertainment
Consumer
Technology
Energy
Life Sciences
Manufacturing/Industrial
Financial Services
Middle East & North Africa
Subsaharan Africa
Central & Eastern Europe
Latin America
Western Europe
Asia-Paci�c
North America
32%
20%
37%
3%
3%4%
1%
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27%
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8%
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Manufacturing/Industrial
Energy
Life Sciences
Financial Services Technology
Consumer
Real Estate & Leisure
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Deal volume share top eight industries
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Deal Flow Indicator21% QoQ
23% YoY22% LAST 12 (LTM) MONTH CHANGE
North America
28% QoQ22% YoY16% LTM change
Latin America
19% QoQ19% YoY33% LTM change
EMEA
20% QoQ23% YoY26% LTM change
Asia Pacific
-4% QoQ30% YoY
31% LTM change
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Regional Snapshot: North AmericaThe volume of deals reaching due diligence in North America is up 28% QoQ and 22% YoY; the QoQ change is especially noteworthy given that it is the greatest quarterly increase since the end of 2009.
It should also be noted that the Q4 2011 increase in data room openings corresponds with widespread media buzz about cash-rich corporate acquirers’ potential M&A plans. The availability of cheap financing in North America is another factor worth considering when looking at the North American DFI.
Non-core asset disposals – a common theme of the past several years – have been a fixture of the North American M&A landscape, and particularly the US landscape. Regional banking consolidation throughout the US has given deal volume a major boost with new mergers taking place on an almost daily basis. The best Q3 example comes from M&T Bank Corporation acquiring Hudson City Bancorp for US$3.8bn. On a smaller scale (and in another corner of the financial services industry) The Hartford Financail Services Group sold its brokerage division Woodbury Financial Services to SunAmerica Financial Group for US$115m.
Energy also remains an important M&A hub for the Americas. Asian investors have been keen to acquire natural resources in the region to feed demand in their domestic markets, and on a more local level US businesses are feeling the knock-on effects of the shale gas boom. This has resulted in an uptick in M&A among petrochemical companies and a lot of interest from the oil majors. Shell, for instance, is going ahead with plans to open a Pennsylvania petrochemical plant that will convert natural gas from the Marcellus play into chemicals.
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EMEA trends
Regional Snapshot: EMEAThe EMEA region registered a 20% increase in due diligence activity QoQ – a particularly encouraging figure, given that quarterly growth in that market had been subdued.
Uncertainty about the future of the euro has left dealmakers understandably risk averse. This at least partly explains the lacklustre deal announcement volume of recent months. But there is a growing sense of “crisis fatigue” as companies begin to recognise that holding off on M&A for too long runs risks of its own – and that only those willing to move now will reap the benefits of buying high quality assets at low valuations.
There are also some important sector-specific deal drivers to consider. In Europe’s financial services sector, banks are running expansive non-core asset sale programmes as they prepare to meet higher capital adequacy requirements under Basel III. Several of the quarter’s largest deals involve European banks that received government support at the height of the crisis – including Belgium-based Dexia and UK-based Royal Bank of Scotland, both of which are overseeing extensive non-core asset sale programmes as part of a broader deleveraging strategy.
Technology, Media & Telecommunications is also a busy sector for dealmaking. The sheer volume of smaller, younger growth companies in this space leaves significant opportunities for larger acquirers. The sector generated one of the first quarter’s largest transactions, with the US$5bn acquisition of UK-based NDS Group Limited, a broadcast software provider, by Cisco Systems Inc.
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Asia Pacific trends
Regional Snapshot: Asia PacificM&A in the Asia Pacific region has been somewhat erratic in recent quarters. Q2 2012 showed a 30% increase in deal volume YoY but a 4% decline QoQ. These figures are not quite as encouraging as the 16% quarterly rise and 58% annual rise registered in Q1, but Q2 still well outperformed the 19% quarterly decline and modest 7% annual rise registered in Q4 of last year.
This reflects the mix of obstacles and opportunities facing acquirers in the region, where the risks and rewards associated with M&A are equally well-known to potential buyers. Strategic acquirers or buyout groups looking to acquire in these markets tend to spend more time scrutinising a target’s financial health, management structure and reputation before embarking on a deal.
As for specific sectors, manufacturing has been crucial to the Asia Pacific region’s growth in recent years, but we have witnessed a slight decline in deal volume here, which may reflect concerns about declining global demand. Other sectors have been resilient – particularly energy – where rising domestic demand in countries like China and India makes a strong case for pursuing deal opportunities.
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Video and web cast linkInterview with Frederic Cho from Handelsbanken
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Regional Snapshot: Latin AmericaIn Latin America, annual deal volume increased by about 20% in Q2 2012, after two consecutive quarters of flat or negative growth.
This uptick demonstrates the appetite for expansion into emerging markets on the part of strategic buyers from Western Europe and North America. Corporate buyers in these more mature markets are well aware that growth prospects at home will be limited for some time and are looking to enter faster-growing markets via M&A.
At the same time, however, there are significant opportunities for domestic acquirers in the region – particularly in the financial services sector which remains one of Latin America’s busiest M&A markets. As banks from the US and the UK retreat from foreign markets like Latin America, they are leaving behind attractive targets for domestic acquirers. This is illustrated quite clearly by the sale of HSBC Costa Rica, HSBC El Salvador and HSBC Honduras – all subsidiaries of UK-based HSBC Plc – to Banco Davivienda for €614m in Q1 2012.
Manufacturing deals have also been high in volume thanks to increased interest from international diversified industrial groups. Some of the largest announced deals in the sector in Q2 2012 targeted Brazilian or Chilean manufacturing outlets. Examples include Luxembourg-based industrial manufacturer Tenaris SA acquiring a 59% stake in Brazilian industrial equipment maker Confact Industrial SA for US$785m; and the US$217m acquisition of a 91% stake in Peru-based Soldex SA by US-based Colfax Corporation.
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Video and web cast linkInterview with Yuri Ramos from Santander
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UK SpotlightDefying the double dip The UK economy may be in a double-dip recession, but dealmakers are finding themselves increasingly busy these days in evaluating potential deals and carrying out due diligence on their most attractive options.
The DFI shows the UK may be entering a promising period of recovery after flat activity over the preceding nine months: the indicator jumped by 28% QoQ and 19% YoY in Q2 2012, the best showing over the past year.
In our conversations with clients, the sense of recovery is starting to be felt. Confidence is returning to the market, as are larger transactions.
Philip Whitchelo Vice President of Product Marketing, EMEA & APAC
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UK Spotlight (continued)Indeed, while the early part of this year was dominated by middle market and small-cap activity, we are seeing bulge bracket banks coming back into the fray to advise sellers on bigger ticket transactions.
In addition to bolstering the value of deals being transacted, we find that this combination of factors is usually a good indication that deal flow is rising overall. Bigger moves in the market stir activity elsewhere, with peer companies and smaller players adjusting their corporate strategies to follow suit.
The UK is a hub for the rest of EMEA and acts as a bellwether for future regional trends, so this can be interpreted as a positive sign for the eurozone economies as well.
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Consumer
Life Sciences
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Guest comment An outlook for the energy industry by Jon McCarter, a partner at Ernst & Young’s Houston office
Jon McCarter Partner Ernst & Young, Houston
Amidst globally muted M&A activity, dealmaking in the energy sector has been strong. The past year has witnessed more than its fair share of headline deals. We are cautiously optimistic about the next 12 months, as our pipelines are full of investment opportunities from joint ventures to acquisitions and divestures. There are several key issues that will impact activity in the industry for the remainder of 2012 and beyond.
US electionRegardless of the outcome, the energy industry is preparing for higher taxes and shifts in the regulatory environment. We’re expecting a rush of deals to be completed by the year’s end to pre-empt any changes forthcoming from new or renewed faces in Washington, but deal flow should be strong and steady. While new obstacles are likely, energy M&A dealmakers will benefit from the lack of uncertainty the elections have placed in boardrooms.
Commodity pricingGiven record low prices, natural gas has come under the spotlight in the energy sector. As usual, movement is hard to predict, but we lean with the bears. This impacts dealmaking as Exploration & Production companies adjust strategically and shift the mix between oil and gas dependent on pricing. We also see money lining up in an effort to export cheap gas. While the calls for energy independence urge to keep gas for home consumption, the arbitrage is just too compelling.
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FinancingIn the current market, deal financing is a case of haves and have-nots. Where the mid-market struggles private equity has been active and joint ventures have formed. In terms of the majors, we fully expect the trend of headlining deals to continue.
RegulationEnvironmental regulation is a growing issue with a few uncertainties. Controversy surrounding fracking and the return of permits for deepwater exploration in the Gulf continue to loom and will potentially change the regulatory landscape. Water and water management will grow in importance as we enter the next cycle of policymaking.
Cross-borderNorth American energy is increasingly expanding shale plays and growth into the emerging markets, especially Brazil. Conversely, European super majors and Asian national oil companies search for the best way to exploit opportunities in the US and Canada. We don’t expect to see significant growth in the near future in Chinese shale.With the lack of supporting infrastructure in China, the need to develop is years away as Exploration & Production companies focus on domestic shale.
ConclusionWe expect the majority of the deals to focus on investment in the upstream segment, midstream infrastructure, and the export side of natural gas. Everyone in the industry is reviewing their balance sheets and making acquisitions where strategically advantageous. One thing is for sure: no one is standing still.
Guest Comment (continued)
27% of total deal volume came from the manufacturing and industrial sector in 2012 – and deal volume jumped 26% from Q1 to Q2
33% rise in real estate deal volume from Q1 to Q2
Consumer sector deal volume rose 11%
QoQ in Q2Technology deal volume up
7% from Q1 to Q2
Q1 Q2
26%
Energy deals account for 16% of total Q2 volume… and saw a 18% increase from Q1 to Q2
Q1
Q2
11%Q2
Q1
INDUSTRY INDICATORS
TECHNOLOGY
MANUFACTURING AND INDUSTRIAL SECTOR
REAL ESTATE ENERGY DEALS CONSUMER
27%
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The IntraLinks Deal Flow Indicator is intended to provide IntraLinks’ perspective on the level of due diligence activity taking place during any given period of time. The statistics contained in this report represent the volume of virtual data rooms opened, or proposed to be opened, through IntraLinks for the purpose of conducting due diligence on proposed transactions including asset sales, divestitures, private placements, financings, capital raises, joint ventures and partnerships. These statistics are not adjusted for changes in IntraLinks’ share of the virtual data room market or changes in market demand for virtual data room services. These statistics may not correlate to the volume of completed transactions reported by market data providers and should not be construed to represent the volume of transactions ultimately consummated during any period of time. In addition, the statistics provided by such market data providers may be compiled with a different set of transaction types than those set forth above.
This report is provided “as is” for informational purposes only. IntraLinks makes no guarantee, representation or warranty of any kind regarding the timeliness, accuracy or completeness of the content of the report. This report is based on IntraLinks’ observations and subjective interpretations of due diligence activity taking place, or proposed to take place, on IntraLinks’ virtual data room platform for a limited set of transaction types. This report is not intended to be an indicator of IntraLinks’ business performance or operating results for any prior or future period. This report is not intended to convey investment advice or solicit investments of any kind whatsoever.
“IntraLinks” and the IntraLinks logo are the registered trademarks of IntraLinks, inc. The IntraLinks Deal Flow Indicator may be used solely for personal, noncommercial use. The contents of this report may not be reproduced, distributed or published without the permission of IntraLinks. For permission to republish Deal Flow Indicator content, please contact [email protected].
© 2012 IntraLinks, inc. All rights reserved.
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About the IntraLinks Deal Flow Indicator
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New York – Corporate Headquarters
150 East 42nd Street8th FloorNew York, NY 10017
Tel: 212 543 7700Fax: 212 543 7978Email: [email protected]
London
44 Featherstone StreetLondon, EC1Y 8RNUnited Kingdom
Tel: +44 (0) 20 7549 5200Fax: +44 (0) 20 7549 5201Email: [email protected]
Singapore
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Tel: +65 6232 2040
Email: [email protected]
IntraLinks Contacts
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About IntraLinksThe IntraLinks (NYSE: IL) enterprise-wide solution empowers global companies to share content and collaborate with businesses partners without losing control over information. Through the IntraLinks platform, companies, partners, and third parties can share and work together on even the most sensitive documents – while maintaining compliance with policies that mitigate corporate and regulatory risk. IntraLinks, the undisputed market leader for deal management and virtual deal room solutions, enables organizations to organize, manage, share, and track information while accelerating the deal process while improving efficiency, access, and professionalism during key phases of the transaction.
In 1997 IntraLinks pioneered the use of software-as-a-service based solutions for collaboration between businesses, starting with the debt capital markets and M&A communities. In the process we transformed the way companies work. Our platform hosts the largest global community of dealmakers, and is the most commonly used platform in the M&A market.
For more information, visit us at www.intralinks.com
About RemarkRemark, the publishing, market research and events division of The Mergermarket Group, offers a range of services that give clients the opportunity to enhance their brand profile, and to develop new business opportunities. Remark publishes over 50 thought leadership reports and holds over 70 events across the globe each year which enable its clients to demonstrate their expertise and underline their credentials in a given market, sector or product.
Remark is part of The Mergermarket Group, a division of the Financial Times Group.
To find out more please visit www.mergermarket.com/remark/ or www.mergermarket.com/events/
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