According to 145 CEOs and CFOs in a survey conducted by KPMG LLP, the U.S. audit, tax and advisory firm, nearly three-quarters anticipate their company will make an acquisition in 2014, with just half indicating they pursued a merger or acquisition in 2013. One-third of the executives expect that their organizations will complete a divestiture in 2014, reflecting a slight increase from 30 percent who said they executed a carve-out last year.
“Today, organizations hold massive amounts of cash, interest rates are expected to remain low in the near term, and consumer confidence is rising. These signs of improvement point to a general feeling of optimism in the corporate and private equity arenas,” says Dan Tiemann, KPMG’s Americas Transactions & Restructuring lead. “M&A is a strategic next step for growth for organizations in the current economic environment, and many CEOs are now viewing deals as an increasingly key attribute to creating long-term equity value for their investors.”
One-third of respondents indicated that recessionary fears and slow economic growth would serve as the greatest inhibitor to mergers and acquisitions (M&A) this year, but large cash reserves will serve as the most significant facilitator for deal activity in 2014, according to nearly 30 percent of the CEOs and CFOs. Corporate buyers will also have an advantage over private equity buyers in 2014, according to 41 percent of respondents.
Almost half of the respondents indicated that the Federal Reserve’s monetary policy will have a moderate influence on their decision to raise or refinance capital in 2014. Reduced government spending will not impact their M&A activity, said half of the survey population. It’s also too early to tell if interest rates will affect deals in 2014, according to nearly half of the CEOs and CFOs. Mid-market deals will dominate, with 91 percent of the CEOs and CFOs expecting their acquisitions to be valued under $250 million.
“If regulations require banks to raise their liquidity positions and capital reserves, as well as tighten underwriting guidelines when it comes to making loans or financing deals, CEOs and CFOs looking to raise capital in 2014 to finance mid-market transactions will need to consider alternative resources and investors,” said Phil Isom, head of KPMG Corporate Finance LLC. Isom added, “Although the timeline is uncertain, companies and management are aware that the government will also continue pulling back on bond-purchasing, with quantitative easing potentially driving interest rates up, incentivizing companies to refinance now ahead of rate increases.”
Industries and Geographies
The industries that are expected to experience the most M&A in 2014 are:
- Technology / media / telecommunications – 41 percent
- Healthcare / pharmaceuticals / life sciences – 38 percent
- Energy – 32 percent
- Financial Services – 28 percent
The primary reason for initiating acquisitions in 2014 will be to expand geographic reach, according to the CEOs and CFOs. The United States will have the most active M&A market, followed by Western Europe, the survey indicated.
“Although still challenging, economic conditions in Europe appear to have stabilized and the debt crisis has created opportunities for companies seeking to expand their global footprint,” said Isom, adding, “As businesses look to refocus their strategies, especially by acquiring new technologies, the potential for growth and profitability in new markets and geographies remains an attractive option.”
Due Diligence and Integration Challenges
The top due diligence challenge faced by CEOs and CFOs in M&A will be assessing volatile future revenue streams of target companies, followed by determining quality of earnings.
“Acquisitive organizations seeking to benefit from this favorable and competitive environment should consider assessing targets with a progressive, data-driven due diligence approach to ensure maximum deal value is achieved, reduce the acquisition’s downside risks, and most importantly, evaluate and expand the acquisition’s value-creation strategies,” said Tiemann.
In order for a deal to be successful, the respondents indicated that a well-executed integration plan is critical. “Executives are turning their attention to deals that bring revenue and cost synergies to their organizations that parallel the organization’s long term growth strategy. At the same time, they should also focus on investing in new growth strategies to create desired returns, which includes an investment in capital expenditures as well as the acquisition of new talent,” Tiemann added.
About the 2014 M&A Outlook Survey
In collaboration with the Research practice unit of SourceMedia, the publisher of Mergers & Acquisitions, KPMG LLP surveyed 1,001 M&A professionals in September 2013, including 145 CEOs (63 respondents) and CFOs (82 respondents).
About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 155,000 professionals, including more than 8,600 partners, in 155 countries.