Multi-billion dollar deals across a variety of sectors dominated headlines throughout the first half of 2014, and despite virtually flat US deal volumes rising deal values could be indicative of an M&A rebound to come, according to EY Transaction Advisory Services.
"Big deals mean that confidence is returning to the boardroom. That - coupled with increasing pressure to grow the bottom line and optimize capital due to shareholder activism - has executives taking a hard look at M&A," said Rich Jeanneret, Americas Vice Chair, Transaction Advisory Services for the EY organization. "Unlike buybacks and dividends, M&A is a strategic way for the C-suite to create value for investors. For the first time since the financial crash, we're seeing CFOs leverage balance sheets in a way that suggests a growing war chest for M&A."
Overall deal volume in the US for the first half of 2014 is relatively flat, down less than 1% to 5,728 deals compared to 5,752 deals in the same period of 2013. However, due to a number of high-profile deals with large price tags, deal value in the US for the first half of the year soared 63% to $904.1 billion in 2014 vs. $554.9 billion in the same period of 2013.
Additionally, whereas 2013 saw the big deals of 1Q slow down by the second quarter, upward trends in 2Q vs. 1Q 2014 M&A data suggest potential for continued momentum through the balance of the year.
Compared to the second quarter of 2013, volume is up 7% to 2,960 in 2Q 2014 vs. 2,756 in 2Q 2013. Looking back to the second quarter of 2013, value is up 154% to $579.9 billion in 2Q 2014 vs. $228.8 billion during 2Q 2013.

Private equity
Private equity activity has been on the rise and fairly consistent across sectors due to successful post-recession fundraising ensuring there is a lot of capital to deploy. US PE acquisitions rose in the first half of the year, up 7% by volume to 435 PE acquisitions year-to-date in 2014, from 405 during the same period in 2013. Value declined 33% to $560.4 billion versus $90.0 billion in 2013.
However, 2013's value was driven by a duo of mega-deals announced in the first quarter of the year - excluding those, the announced value of PE transactions is up 46% year-to-date.
PE firms are particularly focused on achieving liquidity on many of their longtime investments, and the current environment is providing ample opportunity. Aggregate exits rose for the first half of the year to 275 in 2014 from 187 in 2013, and the value of PE exits deals more than doubled, to US$117.3 billion in the first half of the year, putting the industry on track for a record year. While IPOs have been driving the trend, and increase in sales to strategic acquirers is emerging. Total exits via M&A are up 54% in 2014, to 219 such deals. PE-backed IPOs are up 24% year-to-date to 56 vs. 45 in 2013, and value is up 76%.
Strong exit activity and distributions to LPs is fueling significant reinvestment in the asset class. After several years of successive declines, PE dry powder is once again on the rise. Americas funds are currently sitting on $243.4 billion of dry powder. "Robust equity markets and strong investor sentiment has led to one of the most active global IPO markets for PE-back deals in years," said Jeff Bunder, Private Equity Leader for the Global EY organization.
"The industry is currently on pace to exceed the record PE-backed IPO activity of last year, and this momentum has emboldened others to join the queue, with more than 100 companies in the PE IPO pipeline. As M&A continues heating up, we expect to see more assets come to market and more corporates sell pieces of their businesses over the next 12-18 months which will create more buyout opportunities for PE firms."

What's the deal with mega deals?
In the first half of 2014 companies made strategic plays to build foundations for future growth via transformational deals. So far this year, there have been 122 deals valued at more than $1 billion involving the US on either the buy or sell side versus just 87 in the first half of 2013. Of the top 25 deals globally, the US was involved in 16, including eight of the top ten largest deals in 2014. According to EY's US Capital Confidence Barometer, US companies' intention to execute deals larger than $500 million has tripled in the past year to 37%. This could be attributed to increased pressure to grow; as 65% of US companies say growth is their primary focus. It could also be a strategic move to prepare for future success by converging across sectors to keep up with technological advancements by modifying offerings and orienting around the consumer.
"With more companies taking on big deals, we expect to see an increase in deal volume as large corporates will take action to avoid missing out on opportunities before the competition gets the jump on better assets. Volume will start to move up to meet the deal value; the middle market will not want to be left out and will get in on the action too," added Jeanneret.

Shareholder activism indirectly driving deals
EY's US Capital Confidence Barometer found that 19 out of 20 executives say issues raised by shareholders have shaped their boardroom agendas, and this includes influencing decisions surrounding acquisitions, strategic divestments, and spinoffs and IPOs. "Increased activism is causing executives to take a defensive stance and strategically review their businesses," said Jeanneret. "We're noticing that this defensive move is often leading to offensive action and, eventually, deals even before we see shareholder pressure." Most activists' plans include a variety of methods, but approaches recently have been focused on financial leverage and spinoff or sale of non-core assets. In order to prepare for these pressures, companies need to be proactive about assessing vulnerabilities, maintaining close relationships with major investors, and considering the credibility and appeal of potential proposals.
"As the C-suite sees other companies under fire from activist investors, shareholder activism is top-of-mind for many CEOs and should be considered in strategic planning for all public companies, large and small," said Jeanneret.
Meanwhile, shareholder activism could also create opportunities in private equity; as activists push company boards to sell non-core pieces of their businesses, private equity firms are well-positioned and willing to buy.

Hot sectors for dealmaking
While there is a concentration of mega deals in the strong intellectual property industries like telecommunications, healthcare and consumer products, there have been transformational deals spread across many sectors.
"Companies are striving for efficiency and to capture market share," said Jeanneret. "The best way to achieve both is by keeping up with advancements in technology, such as those bringing mobility to consumers. Executives across industries are finding it faster at times to acquire innovation through inorganic growth or third parties."

Telecommunications, Media and Technology
Telecommunications is the sector with the strongest competitive and regulatory value story. In the first half of 2014, volume decreased 4% to 78 deals in 2014 compared to 81 deals in the first half of 2013.
Value on the other hand rose dramatically, up 147% to $14.8 billion in 2014 vs. $6.0 billion during the same period in 2013. Also in line with the overall upward trend of deal activity from quarter to quarter this year, 2Q 2014 deal value spiked $863% over 2Q 2013. "The Media & Entertainment industry is also on the move. The progression since the year 2008, from protecting balance sheets to returning value to shareholders to now emphasizing asset and geographic growth has been amazing to see. In media & entertainment, an increase in the size of transactions and volume is expected," said Tom Connolly, Media and Entertainment Industry Leader, Transaction Advisory Services, for the Global EY organization.
Companies in developed markets need to get into developing markets, but because of higher risks, they will take smaller bites more often in these evolving territories.  In the developed markets there will be an increase in larger deals as competitive consolidation and rising free cash flows feed the appetite for inorganic growth.
The technology sector is experiencing major transformation also, as smaller tech companies are serving millions of customers and continuing to dramatically grow sales. Volume in the first half of this year increased for the sector, rising 5% to 1,298 deals versus 1,235 in 2013. Value also jumped 49% to $91.8 billion during the first half of 2014 versus $61.7 billion during the same period last year. "The massive strides we're seeing made in cloud and mobile right now make this the most transformational time since the birth of the modern technology industry," said Jeff Liu US Technology Sector Leader, Ernst & Young Capital Advisors, LLC. "Innovation is a double-edged sword; as technology becomes a mature industry; incumbent players are forced to rethink their operational and strategic strategies. We will continue to see a lot of deal activity, but innovation is also driving disruption through divestitures as technology companies refocus on their core businesses.

Pharmaceuticals and Healthcare
The wave of high-value deals sweeping the life sciences and healthcare industries promises to reshape the competitive playing field in almost every segment of both industries. Trends will continue to emerge through portfolio pruning and consolidation.
In the life sciences space, deals were down 24%, with 323 deals during the first half of 2014 vs. 423 deals over the same period in 2013.
However, there was a substantial increase in value; value was up 71% during the first half of 2014 to $253.9 billion vs. $148.9 billion during the same period of 2013. Moreover, value in 2Q 2014 was up nearly 200% over 2Q 2013. "The life sciences sector is exploding in a way it hasn't in twenty years," said Benjamin Perkins, Group Head of Life Sciences M&A at Ernst & Young LLP. "Transaction activity is hot in the specialty biopharm space in areas like immunotherapy and immuno-oncology, since often it is easier for pharmaceutical and life sciences companies to buy the pipeline rather than create it. This year we also saw interesting marriages, with generic companies moving into the branded space.  Companies are becoming more creative about getting deals done as they reassess their portfolios, so we will see more swaps, outsourcing, and innovative forms of transactions throughout the year as these companies focus on what they do best." The healthcare sector is showing signs of life", and we continue to see conversations between the healthcare and life sciences sectors as these industries converge. Provider care deal volumes are down 15% to 200 in the first half of 2014 compared to 234 in the same period of 2013. However, value skyrocketed 110% in that period to $15.7 billion in 2014 from $7.5 billion in 2013. "This year we have seen international interest in importing US healthcare as part of a broader trend of national inpatient chains looking around internationally," said Greg Park, US Healthcare Sector Leader for Ernst & Young Capital Advisors, LLC.  "US healthcare companies have been watching the markets and they are now making moves both out of a herd mentality and out of necessity. At the same time, they continue to face challenges of new entrants and increased competition for patients."

Consumer Products
Consumer products deal activity was down slightly this year, but confidence is up, and activity is likely to heat up going forward.
Deal volume in the first half of the year has risen 3% to 511 deals from 494 deals during the same period in 2013. Value for the first half of 2014 was down 5% to $67.
 billion vs. $71.0 billion during the same period in 2013.[18] "There is a supply/demand imbalance in the consumer products transactions sector, as a lot of money is chasing very few quality transactions" said Steve Potter, US Consumer Products Leader for Ernst & Young Capital Advisors, LLC.  "Companies are no longer being rewarded for size, but staying focused and growing their earnings base. We are at an inflection point where confidence and the desire for deals is high; looking ahead, the increase in the number of deals announced in the first half of this year should accelerate." Conclusion "We're experiencing a good environment for dealmaking: balance sheets are strong, debt markets are easily accessible and equity markets are showing resilience. Additionally, companies' stock prices are being rewarded when they do M&A, which is a positive sign of things to come," concluded Jeanneret.