Analysts expect a brisk market for M&A deals in coming months amid an improving environment for financing and a desire on the part of well-capitalized companies to beef up their operations through buyouts.
Several sectors should see a rise in activity compared with the last couple of years, ranging from technology and telecom to pharma, banking, energy and media.
Expect a strong mix of private equity transactions and strategic buyouts, analysts say, with the occasional megadeal involving big players with large coffers of cash.
The bullish outlook remains despite a sell-off in stock markets this year — something that ordinarily tamps down the appetite for deal-making, even as buyout targets become cheaper.
For now, most analysts expect the M&A market to rebound from a so-so 2013, which featured a couple of large transactions that helped push the dollar value of deals higher but otherwise experienced a slowdown in activity.
Amanda Levin, editor of the Americas for Mergermarket, a merger-and-acquisitions researcher and consultancy, says 2013 "turned out to be more of a transitional year. There was a huge influx of deals early on, then it sort of petered out after that.
She says 2014 is shaping up to be a busier year.
"All indicators driving M&A are in place right now," she said. "You have a good financing environment for private equity, so they can leverage up a company.
Confidence Begets Activity
Meanwhile, CEOs "are confident that the economy is better, so they want to spend more money, hire people, buy new equipment and engage in strategic transactions," she added. "This year will be more robust than the past couple of years.
A report from Trefis, citing data from Thomson Reuters, shows that 2013 generated the lowest number of deals announced (36,800) and completed (27,194) since 2005.
During the fourth quarter, Trefis says, global investment banks completed M&A deals worth a total of $586 billion, up 29% vs. Q3 but down 12% from the 2012 fourth quarter.
One reason for optimism about this year's M&A market is the improving macro-environment, analysts say.
"Executives are reassured by the improving global economy and decreasing uncertainty," said Dan Tiemann, Americas Transactions & Restructuring lead for KPMG. "Large cash reserves and attractive investment opportunities should result in more deal-making for U.S. companies.
KPMG's 2014 M&A Outlook Survey Report, which gauges the opinions of deal makers and corporate executives, found that 63% of respondents said they plan to be acquirers this year.
Among the factors expected to facilitate deals include large cash reserves and commitments, opportunities in emerging markets, the availability of favorable credit terms, improved consumer confidence, improving equity markets, and the recovery of the financial services sector.
The wild card is whether, and how, the recently sagging stock markets will impact M&A activity. That's not always easy to predict, says Bob Rubino, executive vice president and head of corporate finance and capital markets for RBS Citizens.
"For M&A to be robust, you have to have confidence and equilibrium," he said. "(Until recently) you've had this adrenaline driving the financial markets. The multiples rose dramatically over the last 18 months to two years.
In turn, valuations of companies also rose rapidly, even as the economy inched along at a snail's pace. This pattern might have created hesitancy on the part of some deal makers to pay high prices for buyout targets.
"There was a disconnect between the real world economy vs. the financial markets," Rubino said. "You have a hyperinflated sense of what a business is worth.
One potential positive of a stock market correction is that valuations will be a little easier for buyers to swallow. At the same time, companies that see their own valuations decline might be a little less antsy to pull the trigger on buyouts.
Strong Start For 2014
In any case, the M&A market has already seen a rise in activity this year. According to a report from Thomson Reuters, deal-making activity in January totaled $228.2 billion, "the strongest opening month for worldwide M&A since 2011.
Big deals announced in January include Charter Communications' (CHTR) $62 billion bid for Time Warner Cable (TWC), which Time Warner has so far rejected; the $16 billion bid by Japan's Suntory to buy U.S. spirits maker Beam (BEAM); and Liberty Media Group's (LMCA) $11 billion offer to acquire Sirius XM Holdings (SIRI).
The biggest deal last year was Verizon's (VZ) agreement to purchase Vodafone's (VOD) 45% stake in Verizon Wireless for around $130 billion. However, that was mostly a matter of Verizon taking full ownership of a unit it already controlled operationally.
In terms of traditional transactions, the two biggest deals of 2013 were the $28 billion buyout of Heinz by Berkshire Hathaway (BRKA) and 3G Partners, and the $25 billion acquisition of Dell by founder Michael Dell and private equity firm Silver Lake.
Mergermarket's Levin reckons 2014 is also ripe for a couple of megadeals involving strategic buyouts, especially in the tech sector.
"You have all of these really mature tech companies, like Google (GOOG) and Microsoft (MSFT), all trying to look for the next big thing," she said. "For those guys, the best way to do it is not organically but to go out and buy a really hot company.
Google will have a little more money in its coffers when it closes the sale of its Motorola Mobility smartphone unit to Lenovo. That deal, valued at about $2.9 billion, was announced on Jan. 28.
Google bought Motorola Mobility for $12.5 billion in 2011.
Similarly, many private equity funds have large amounts of uninvested capital that can be used for buyouts, says Marc Moyers, KPMG's national sector leader for private equity.
"They are seeking attractive opportunities, especially in emerging markets and in industries that exhibit the potential for above-average growth," Moyers said.
Levin also looks for a busy year in emerging markets, as well as in Latin America.
"There should be a lot of activity in Latin America," she said. "It's more compelling than Asia to investors in the U.S. because it's closer, and there are very significant companies there.
Activity in Europe has already been brisk this year. According to a report from Thomson Reuters, European M&A totaled $53.6 billion year-to-date through Feb. 7. That is up 32% from a year ago and marks the strongest start for deal-making in Europe since 2011.
By comparison, M&A activity in Asia-Pacific totaled $35 billion year-to-date, a 1% gain vs. 2013.
In terms of deal size, the middle market should produce the lion's share of deals this year.
Less Than $250 Million
According to the KPMG survey, more than three-quarters of respondents said the average enterprise value per acquisition for their companies would be less than $250 million. Another 12% set the figure at $250 million to $499 million.
RBS' Rubino, whose company mainly deals in the middle market, says private equity firms will be busy "both trying to acquire and to monetize existing investments.
On the corporate strategic side, he looks for companies to take a more measured approach this year.
"In 2013, firms that were selling really were intent on selling right now, and on selling all of the company," Rubino said. "Today they might be willing to wait a little longer, and to sell only part of the business.
On the buy side, he says, "they are doing kind of the same thing. Maybe I'll buy in Europe, or buy a new product line. It has to have strategic value."