Forbes contributor, Michael Schwerdtfeger, recently commented that “2014’s dynamic merger & acquisition market is galloping right into 2015.” Citing various sources, he notes that 2014 was the strongest year for deal-making since at least 2008, with a 47% increase over last year. The overall value of deals in North America grew by nearly 55% due to a number of market factors, including large cash stockpiles, cheap financing, and a trend for large corporations to focus on external growth as opposed to increasing revenue with current business divisions. Schwerdtfeger highlights the three industries that saw the greatest growth: telecommunications and media, pharmaceuticals and healthcare, and energy.
Recent publications, by EY and 451 Research, respectively, outline the reasons why 2015 will be another very strong year for M&A, and particularly in the global life sciences and technology sectors.
Global life sciences
EY has published its annual Firepower Index and Growth Gap Report (the Firepower Report), which measures the ability of companies in the health and pharmaceutical industries to do M&A, based on the strength of their balance sheets, which EY interprets as the ‘firepower’ that a company has to engage in M&A transactions. The Firepower Report begins with an overview of why 2014 was such an important year in the life sciences sector, during which the global M&A deal volume was twice the average of the previous decade, at over $200 billion. EY explains this by pointing to the unusually high purchase and sale of corporate divisions between large pharmaceutical companies.
EY predicts that life sciences companies are entering 2015 with “bolder aspirations” and strong performance across the industry, which will together “fuel M&A momentum as biopharmas work to build strategic franchises.” In addition, there will be particularly high growth in the therapeutic products sector, with increased growth for biosimilar companies and potentially increased growth for generic manufacturers waiting for approval to begin distributing “blockbuster” drugs. EY notes that, given the scarcity of “high-quality growth assets,” targets will command premium valuations; this will result in fewer companies engaging in ‘transformational’ M&A, while more companies engage in bolt-on (also known as ‘tuck-in’) acquisitions. EY also suggests that companies will look to implement “novel deal structures,” in which they gain rights to products at earlier stages, on a risk-adjusted cost basis.
451 Research, a research and advisory firm focused on the business of enterprise IT innovation within emerging technology segments, has published its annual M&A Outlook Report, which is a summary of data and opinions collected from market analysts, and offers speculation on the growth and direction of the tech industry with respect to M&A. The report begins with an overview of the market coming out of 2014, and moves onto the activity and valuations of tech companies, and the forces that will be affecting transactions in the coming year.
451 Research identifies a number of themes they expect to see:
- Companies will look for the exclusive ownership of high-value cloud infrastructure systems, as they further seek to customize software service solutions;
- Network performance management companies will attract greater attention as the monitoring and optimizing of networks becomes more important;
- Legacy data management companies will have to adjust to a greater dependence on cloud services;
- There will be consolidation of companies offering information security services, as corporate customers increasingly demand simplicity;
- Companies in the mobile deployment arena will need to expand their offerings to implement ways to test, measure, and monitor the quality of the user experience; and
- Advertising technology companies will continue to see M&A activity, but with a particular focus on buying, selling, and measuring ads in the infrastructure created by the changes we saw through the M&A activity of 2014.
The author would like to thank Reuben Zaramian, articling student, for his assistance in preparing this legal update.