Last year saw global M&A pass the $5 trillion mark for the first time ever, according to Dealogic.
With deal activity reaching new heights, the next question for M&A players is which sectors are thriving in this prolific deal environment.
Here are a few predictions from industry experts.
Last year technology deals reached $1.7 trillion in overall deal value, according to figures from Denver-based investment banking firm SDR Ventures (an Axial member).
As companies become preoccupied with starting to reorganize their operations after closing these deals, an overall slowdown in the market may result.
However, this expected break in activity should be limited to large tech conglomerates that have already made their acquisitions. This opens the door for firms that “will likely seek out smaller deals within the middle market, looking to capitalize on the slowdown, and acquire companies they believe will help their future growth,” says Chris Bouck, a principal at SDR.
In this vein, certain pockets of the technology sector will likely experience an increase in dealmaking. Adams Price, a managing director at The Forbes M+A Group (an Axial member), says the areas that “will continue to do well in the technology sector include SaaS, data analytics, and IT staffing companies, among others.”
What are driving these transactions? “Generally IT unemployment is so low that it may be easier to buy a company that already has IT personnel,” Price says. “This is particularly true for specific segments such as big data and analytics formation where employees are relatively scarce and the market is just not churning out enough of them globally. The businesses are also attractive because of their recurring revenue and predictable EBITDA. This is also true for business services firms with long-term contracts.”
The healthcare sector will continue to stay red hot throughout 2016, a continuation of 2015. Last year was a banner year for healthcare M&A, based on the year’s record deal volume and dollars spent on transactions.
During this period, there were several mega mergers in the pharmaceutical and health insurance industries and more than 50 $1 billion deals across all the other healthcare and life sciences verticals, says David Lopez, a vice president from The Merit Harbor Group (an Axial member).
Lopez adds that consolidation continues to be driven by “the healthcare industry coming to grips with the Affordable Care Act and its triple aim of improving the experience of care, health of populations, and reducing per capita costs.”
Other factors that may spur healthcare M&A in 2016 include a growing economy, low interest rates, and cash-flush balance sheets.
SDR says that the number of M&A transactions in the manufacturing sector last year was not out of the ordinary. However, the amount of capital invested rose by an astounding 103% year-over-year.
The drastic change resulted from the deluge of mega-deals that occurred throughout the year. SDR says the last half of 2015 saw the highest level of M&A activity for both the medical equipment and machinery and equipment industry segments.
Specifically, medical equipment was the hottest area in Q4 2015 for the manufacturing sector. “One of the main driving factors for this growth was the advancements made in medical technology over the past year,” Bouck says. “As medical technology continues to advance, medical equipment companies are making transactions in order to fill gaps in their portfolio of products offered.”
“The telecom space has had a surge in terms of M&A activity over the last few years,” says Craig Dickens, Merit Harbor’s CEO and founder. “Total deal value in 2015 alone has evidenced the strong upcoming emergence of the sector. The growth will be driven by bigger companies attempting to create economies of scale by acquiring smaller players.”
SDR’s research team says that in this space, communications equipment acquisitions seem to be the most effective approach as of late given the high barriers to entry and a market dominated by a few major players. They added that smaller players that are able adapt to the rapid technological advances can likely receive higher valuations.
Oil & Gas
Although expectations are for an active M&A market for oil and gas companies in 2016, distressed sales would probably dominate. The sector “will likely see more transactions in the coming year,” says Forbes M+A’s Price. ”This will not be because of great multiples, but because the stronger survivors will be picking up bargains as prices continue to languish.”
As SDR analysis states, the debt loads of exploration and production companies have increased to $200 billion from $50 billion over the last 10 years. Meanwhile, second- and third-tier oil and gas fields will be up for sale as companies focus solely on core positions with the lowest operating cost. “With production and prices down, the cost of these assets will be the cheapest since 2009/2010, but there should be plenty of buyers who will be looking to get a deal,” SDR’s Bouck says.
Not all retail M&A is created equal. “There is a distinction that should be made between storefront and online retailers,” Price says. “Storefront retailers have to deal with the transition from brick and mortar to online shopping.”
Consumers can get their merchandise delivered quickly, which is one reason why online retailing is experiencing an uptick. “This is becoming very competitive and more cost effective than having inventory in the mall,” he says. “So, particularly successful online retail operations will likely continue to see premium opportunities in the market.”
Food & Beverage
The trend of consumers increasingly wanting healthier products is driving the rise in food and beverage deals, which also saw an active 2015.
“Consumers are redefining this category through trends such as being able to access understandable ingredient lists, minimizing food additives, ethical sourcing, and convenience,” Bouck says. “Large players are looking for ways to break into new channels such as convenience stores and want better exposure to emerging markets in order to put a strong US dollar to work and to buy some assets outside of the United States.”
The above trends in the food and beverage industry are extending to pet food companies.
Firms in the healthy, natural, organic and therapeutic food space “will continue to trade for premium valuations with larger strategic buyers attempting to stay on trend and acquire strong brands that can be scaled,” SDR’s Bouck says. “For many young couples and empty nesters, pets, especially dogs and cats, are now seen as ‘replacement kids.’ As a result, trends that apply to humans are extending to pets.”