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PwC on Mergers and Acquisitions Activity

mergerPricewaterhouseCoopers’ recent review indicates that the mergers and acquisitions market in the United States will continue to gain steam through the second half of this year. It offers the same lesson we took from John Paulson’s remarks at Delivering Alpha. But the subject is important enough to deserve some detailed reinforcement.

Martyn Curragh, PwC’s U.S. deals leader, said in a statement, “Corporate boards are deploying record amounts of cash to increase returns, and high stock prices are emboldening buyers and sellers. The strong U.S. economy and rising confidence signals a strong finish to 2015, making it another record year for M&A value since 2007 and the doldrums of the financial crisis.”

Greed and Fear Both at Work

These conclusions arise in part from PwC’s annual CEO survey, the most recent iteration of which shows that 54% of the U.S. CEOs questioned plan to complete an acquisition in 2015. This contrasts markedly with the analogous number for Germany’s CEOs (17%) as well as those for the UK (20%), Japan (33%), and China (28%). France, as it happens, is looking buoyant right now, from the point of view of the CEO office anyway. A healthy 43% of that country’s CEOs questioned said that they plan to complete an acquisition in the remainder of this year.

The expectations come about for both of the two classic reasons: greed and fear. In the words of Alex Molinoroli, the chairman and CEO of Johnson Controls, “Not moving is more risky than moving. We will make more acquisitions, but they’ll probably be larger in nature, more transformative. That’s a big part of what we’re trying to accomplish.”

In the first five months of 2015 U.S. M&A activity came to $875 billion worth of deals, according to the data PwC says it has analyzed from Thomson Reuters. Compared to the same period of 2014, that is a 9% increase in value.

Cross-border, cross-currency activity

Much of the activity is cross-border, and is fueled by the strength of the U.S. dollar. Yet there are cross-border bids even when the U.S. dollar is not especially strong. Consider the dollar and the Swiss franc (USD/CHF). This ratio was at 1.10/1 last August. Ignore for a moment the dramatic zig-zag at the end of last year and the start of this, related to that country’s abandonment of the peg of its currency with the euro. Ignoring that, over the last twelve months the value of the U.S. dollar against the franc has risen, yes, but has not risen dramatically. The ratio now stands at 1.04/1.

In that context, the U.S. agribusiness giant Monsanto clearly wants to purchase the Swiss counterpart, Syngenta, and to that end it bid $45 billion on May 8th. This, says Dealogic, is “the largest announced US acquisition of a European target on record.” It also can’t really be considered a forex-driven deal. It is driven by the logic of the two complementary businesses.

Were it consummated, Monsanto/Syngenta would clearly fall into PwC’s categorization of “mega-deals,” defined by a threshold of $10 billion. Mega-deals have accounted for 58% of the total deal value of 2015 YTD.

Along with the surge in both ordinary and mega-level mergers and acquisitions, there exists a thriving market for joint ventures and alliances. Curragh said that this is due to the blurring of boundaries across industries, which has organizations “looking for opportunities to stimulate innovation and gain access to new technologies as much as they are looking for n a conduit to new customers and geographies.” Among U.S. CEOs, 47% ranked access to new or emerging technology as one of the top three reasons for the creation of a new partnership.

Reviewing Four Fields for Deals

But let’s get back to full-on mergers for our final observations: PwC says that it expects merger activity through the remainder of the year to be concentrated in four fields: technology; pharmaceuticals; entertainment & media; oil & gas. A word about each.

Technology. In May, Avago Technologies announced that it would buy Broadcom for $37 billion ($17 billion in cash). That deal is all about the hardware. But of the software side, the dealing these days is driven mobile computing and social networking.

The pharmaceutical industry has generated the largest number of megadeal in 2015 thus far. PwC says that the “buy or be bought” mentality will continue to make itself manifest here.

In the entertainment/media market, “quality and compelling content” is just as important a driver of deals as is the “infrastructure and bandwidth needed to meet consumer demands.” Thus, considerable “disruption” lies ahead for this space.

In the oil & gas world, prices have been extremely volatile in recent months. The UN/Iran del has perhaps made them even more so. Balance sheets will have to be “right sized” and “borrowing base redeterminations” will take effect, all of which will play into the deal activity.