H1 2015 | The Deloitte M&A Index

The Deloitte M&A Index H1 2015 The deal momentum continues into 2015 Key points Contacts • In our previous reports we highlighted that globally corporates are in a strong position to Iain Macmillan pursue M&A. They have rebuilt their balance sheets, accumulated record levels of cash and Head of UK M&A stock market rallies have boosted their valuations. and New Growth +44 (0) 20 7007 2975 • Our projections of the M&A volumes show that the momentum that started last year is [email protected] continuing in 2015. Despite the expected dip from Q4 to Q1, the Deloitte M&A Index forecasts deal volumes for H1 2015 are likely to be 8% higher than for the same period in Sriram Prakash 2014. So far this year $583 billion worth of deals have been announced, surpassing the Head of M&A $563 billion announced in Q1 last year. and New Growth Insight +44 (0) 20 7303 3155 • M&A volumes are being influenced by factors such as the decline in oil prices, appreciation [email protected] of the dollar, the rise of China as a global player in M&A and pressure from investors to focus on top-line growth. The diverging growth trajectories between the US and other economies are opening ‘deal corridors’ for US corporates to acquire attractively priced assets abroad. We estimate nearly one in four dollars spent on deals in Europe last year was either from the US or Asian countries such as China. • In addition to the UK, six other European nations are planning to hold elections in 2015. The build up to US elections next year will also start in the coming months. These events could have a temporary impact on the pick-up in deal momentum. Figure 1. The Deloitte M&A Index Q2 2015 Global M&A deal volumes M&A deal 9,500 forecast High: 8,900 9,000 Mid: 8,600 8,500 Low: 8,300 8,000 7,500 7,000 Last twelve months deal volumes 33,500 33,400 33,300 33,200 33,100 33,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 Deloitte M&A Index M&A deal volumes Last twelve months deal volumes (projections) (actuals) Sources: Deloitte analysis based on data from Thomson One Banker

2 | The Deloitte M&A Index H1 2015 Factors influencing M&A in H1 2015 Europe emerging as the preferred target Figure 2. Total deal values for domestic and inbound European M&A 1 15 YTD) region for inbound acquisitions (2000- So far this year six of the top ten deals in Disclosed deal values ($bn) Europe were from non-European acquirers. 1,500 Last year $797 billion worth of deals were announced in Europe of which $212 billion, 1,200 or 27 per cent, were deals with non-European 900 acquirers, the highest percentage of inbound deals into Europe in well over a decade. 600 This means that nearly one in four dollars 300 spent on European M&A came from either 0 the US or Asia. 0 1 D 200 200 2002 200320042005 200620072008 200920102011 2012201320142015 YT The European Commission has recently Domestic deal values ($bn) Inbound deal values ($bn) upgraded its growth forecasts for Europe citing weak oil prices and the declining euro Source: Deloitte analysis based on data from Thomson One Banker as the factors that should boost recovery prospects. We anticipate that the positive growth outlook combined with favourably priced assets are likely to continue attracting dealmakers into Europe in 2015. Oil: Race to the bottom could give a boost Figure 3. Price of Brent vs. M&A deal volumes by oil and to M&A gas, petrochemicals and pipeline companies as acquirers The sharp decline in oil prices has eroded (2000-14) the profit margins of oil companies and put $/bbl Deal volumes pressure on capital expenditures, refinancing 120 1400 and the ability to raise additional debt. 100 1200 80 1000 The decline has increased the risk of asset 60 800 impairment and has had an adverse impact 40 600 400 on the valuation of many companies. 20 200 0 0 The shape and time frame of the oil price 200020012002200320042005200620072008200920102011201220132014 recovery is widely debated. The challenge Brent ($/bbl) Deal volumes for the industry is to adjust to new market conditions to improve returns on capital. Source: Deloitte analysis based on data from Thomson One Banker and Bloomberg This means that both conventional oil companies and shale producers are now under pressure to drive down costs and improve operational efficiencies. M&A is one way to achieve this. 1. 2015 YTD as at 18 March 2015

The Deloitte M&A Index H1 2015 | 3 Factors influencing M&A in H1 2015 The strengthening dollar is fueling cross- Figure 4. Global currencies depreciation against the dollar since the beginning border M&A activity for the US corporate of 2014 vs. increase in deal volumes (%), 2013-14 sector 40% The strengthening US economy has led to a 30% 31% weakening of many global currencies against 30% 27% the dollar. These conditions are giving a boost 20% 19% 12% 13% 15% for cross-border M&A activities for the US corporate sector as many assets abroad now 10% 4% look more attractive in dollar terms. We have 0% observed an increase in inbound deal volumes -2% -1% from the US in countries whose currency has -10% -9% -8% -13% -10% depreciated against the dollar. For example, -20% -16% since the beginning of last year the euro lost -21% 21% of its value against the dollar while in -30% Europe Canada Japan Switzerland UK Singapore India China 2014 inbound deal volumes into Europe from Change in currency against USD (%) the US increased by 30%. Change in inbound M&A volumes from the US (%) Source: Deloitte analysis based on data from Thomson One Banker and Oanda ‘Economy of expectations’ Figure 5. S&P Global 1200 Index vs. S&P Global 1200 constituents’ In 2015 the S&P Global 1200 Index reached revenue growth (2001-15 YTD)2 record highs; however, annual revenue S&P Global 1200 Index growth for its constituents has been declining 2,500 25% for three consecutive years. 2,000 The search for yield by investors following 1,500 the US programme of quantitative easing, 0% 1,000 coupled with major corporate share buyback 500 and dividend programmes, has driven valuations and sent indices to new highs. 02001 02 03 04 05 06 07 08 09 10 11 12 13 142015 -25% Following the end of quantitative easing in the US, investors are likely to focus on S&P Global 1200 Index fundamentals and CEOs will be under more S&P Global 1200 constituents’ revenue growth (%) pressure to meet market expectations. Source: Deloitte analysis based on data from Bloomberg With top line performance still hard to realise we anticipate that companies will increasingly need to pursue options such as M&A to achieve growth. 2. 1,165 companies reported their full year results by 23 March 2015

4 | The Deloitte M&A Index H1 2015 China emerging as a powerhouse in cross-border M&A Chinese companies are countering the M&A deal flows reflect the shift in China’s slowdown in their economy with a economy from export-oriented to consumption remarkable international expansionary driven. For instance, in the last few years the programme. In 2014, Chinese companies consumer business sector has been steadily announced a record $46.8 billion of increasing as an investment destination, outbound M&A, the highest figure so far overtaking the traditional manufacturing and and more than ten times the amount spent E&R sectors. In fact acquisition volumes in the a decade ago. Europe received the largest E&R sector declined by 10.3% in 2014 over the share of China’s foreign M&A investment previous year. with deal values tripling from $4.1 billion in 2013 to $13.5 billion in 2014. State-owned Another major ongoing shift is the sharp enterprises seeking growth opportunities increase in acquisitions in the TMT sector, abroad received a boost when the regulatory where deal volumes rose by 106% as Chinese approval threshold was raised to $1 billion. companies spent nearly $11 billion on M&A. Deals such as Baidu’s investment in Uber and Lenovo’s acquisition of Motorola Mobility reflect China’s ambitions to acquire technologies and capabilities to drive innovation. 3 Figure 6. Total Chinese outbound M&A volumes by target sector (2013-15 YTD) Deal volumes 70 64 64 64 58 60 53 52 50 46 40 35 31 30 20 16 15 16 14 7 10 10 9 9 10 4 77 4 3 1 0 Consumer Energy & Financial Life Sciences Manufacturing Professional Real Technology, Media Business Resources Services and Healthcare Services Estate and Telecomms 2013 2014 2015 YTD Source: Deloitte analysis based on data from Thomson One Banker 3. China includes Hong Kong (SAR)

The Deloitte M&A Index H1 2015 | 5 Spotlight on mobile sector M&A Last year 364 deals were announced In two of the world’s biggest mobile markets, involving mobile operators, the highest China and India, increasing competition is since 2011. In the UK, rapidly changing encouraging mobile carriers to look abroad consumer consumption habits have led to for growth opportunities. China Mobile M&A and joint venture announcements recently announced the acquisition of an that are reshaping the telecoms market. $881 million stake in True Corp, one of The ramifications of these deals could be far Thailand’s leading operators. reaching as sellers could use their proceeds to invest or do more M&A in other markets once Carriers will need to innovate to drive future they exit the UK. revenues and to that end we expect them to make smaller acquisitions in areas such as In Europe intense competition has eroded the telematics and the Internet of Things to derive margins of mobile operators. Consolidation new revenue streams. is widely expected, following which the remaining operators will be able to realise cost synergies and free up capital to invest in infrastructure and digital technologies. Figure 7. Total volumes and values of M&A involving mobile carriers (2010-15 YTD) Deal volumes $bn 160 180 160 120 140 120 80 100 80 60 40 40 20 0 0 20120100 20120111 20122012 20132013 20142014 20152015 Q1Q1 Q1Q1 Q1Q1 Q1Q1 Q1Q1 YTYTDD Deal volumes (LHS) Disclosed deal values (RHS) Source: Deloitte analysis based on data from Thomson One Banker

6 | The Deloitte M&A Index H1 2015 The Deloitte M&A Index H1 2015 | 7 Impact of oil prices on M&A Oil companies were under pressure to deliver growth and Number of negative profit warnings returns even before the collapse in oil prices. Between 10 December 2008 and June 2014 the S&P Global Oil Index 10 9 annual returns were 10.9% compared to the S&P Global 8 1200 Index that on average returned 13.0%. 6 6 6 5 4 S&P Global 1200 Index vs. S&P Global Oil Index 2 rebased to the end of 2008 0 Q1 Q2 Q3 Q4 Q1 250 2014 2014 2014 2014 2015 YTD 200 The immediate impact was a rise in profit warnings. Since 150 the beginning of 2014, we estimate that 36 oil companies have issued profit warnings… 100 50 0 Cash reserves and debt of S&P Global Oil Index 14) 2008 2009 2010 2011 2012 2013 constituents (2000- Price of Brent vs. M&A deal volumes by oil and $bn gas, petrochemicals and pipeline companies as acquirers S&P Global Oil Index S&P Global 1200 Index 1400 (2000-14) Source: Bloomberg; Deloitte analysis 1200 $/bbl Deal volumes 1000 1400 800 120 600 100 1200 400 80 1000 Price of Brent 200 60 800 $/bbl 0 40 600 150 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 400 20 200 Cash reserves ($bn) Debt ($bn) 0 0 100 …at the same time the cumulative debt of the S&P 200020012002200320042005200620072008200920102011201220132014 Global Oil Index constituents has reached more than Brent ($/bbl) Deal volumes 50 $1 trillion in 2013, outpacing the growth on cash reserves. This presents a challenge for both debt • We estimate that 26% of the companies in the Index servicing and refinancing … hold 80% of the cash reserves. Companies with 0 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Capital expenditure of S&P Global Oil Index constituents strong balance sheets may want to acquire assets at 4 attractive valuations. The current environment creates (2008-14) Brent crude oil price Capex ($bn) Capex growth rate, % opportunities for companies to use M&A to reposition 800 30% themselves Source: Bloomberg; Deloitte analysis 700 The sharp decline in oil prices has created a new set of 600 20% challenges for the oil industry. 500 10% 400 0% • We expect some consolidation deals as many oil 300 production and services companies now need to 200 -10% 100 focus on cost reduction due to cut backs on capital 0 -20% 2008 2009 2010 2011 2012 2013 2014 expenditure. S&P Global Oil Index Capex ($bn) Capex growth rate, % …and also placing additional pressure on capital 4. 7 companies are yet to report their capital expenditures for Source: Deloitte analysis based on data from Bloomberg, Thomson One Banker and Factiva expenditure investments. 2014, Bloomberg estimates are used instead

8 | The Deloitte M&A Index H1 2015 M&A trends in geographies In 2014 European companies as acquirers Figure 8. Global deal values by region of acquirer and target ($bn) and the e of each region in the global M&A market by year (%), 2013-15 YTD were involved in $771 billion worth of deals, shar which represented 28% of global M&A Disclosed deal values by region of acquirer ($bn) market. So far in 2015 European companies 1,600 have been less active as acquirers and have 1,400 48% announced only $68 billion worth of deals, representing a global share of just 14%. 1,200 51% 1,000 In contrast, the pace of M&A has picked up 28% 800 in the US and Asia. As of mid-March 2015 20% North American companies announced $279 600 22% 23% billion worth of deals representing 55% of 400 55% the global M&A market and during the same 200 28% 14% 2% 1%1%1% 3% 2% period Asian companies announced $141 0 billion worth of deals, a 28% share of the Africa/ Asia- Europe North South global M&A market. Middle East Pacific America America 0 2%1% 1% 3% 3% 2% 200 20% 23% 400 54% 21% 24% 600 19% 800 28% 1,000 50% 1,200 1,400 49% 1,600 Disclosed deal values by region of target ($bn) 2013 2014 2015 YTD Source: Deloitte analysis based on data from Thomson One Banker

The Deloitte M&A Index H1 2015 | 9 M&A trends in sectors Last year there was a strong rebound in deal Dealmaking in the consumer business sector values across all sectors. TMT led the way also picked up in 2014 with a total of $411 with $559 billion worth of announced deals billion worth of deals announced, an increase and this trend seems likely to continue in of 37% over 2013. Since the beginning of 2015. So far this year, $123 billion worth of this year nearly $81 billion worth of deals deals have been announced, outpacing all have been announced and with many other sectors. consumer business companies reviewing their portfolio and divesting non-core assets, we expect a strong H1 for this sector. Figure 9. Global deal values by target sector ($bn), 2013-15 YTD Deal values ($bn) 600 559 471 493 500 411 400 342 367 301 314 327 311 285 300 192 171 165 200 123 81 56 82 61 100 40 51 0 Consumer Energy & Financial Life Sciences Manufacturing Real Technology, Media Business Resources Services and Healthcare Estate and Telecomms 2013 2014 2015 YTD Source: Deloitte analysis based on data from Thomson One Banker

10 | The Deloitte M&A Index H1 2015 Corporate barometer Analysis of the S&P Global 1200 Figure 10. Company fundamentals, S&P Global 1200: 2013 v 2014 average company data: Average revenue growth fell from Average cash in hand ($bn) 2.2% in 2013 to -0.9% in 2014. 5.1 0 10 Second, average cash in hand per company 5.7 decreased from $5.7 billion as at the end of 2013 to $5.1 billion for 2014. This compares Average EPS($) with FCFF across the S&P Global 1200, which 3.3 increased from an average of $1.7 billion in 0 5.0 2013 to $1.8 billion in 2014. 3.0 Third, average dividend payments per Year-on-year average revenue growth (%) company increased from $754 million in -0.9 2013 to $779 million in 2014, continuing -2.0% 3.0% the trend of returning cash to shareholders. The average EPS also increased from $3.0 in 2.2 2013 to $3.3 in 2014. Average dividend paid ($m) Finally, average capital expenditure per 779 company fell slightly from $1.6 billion to 600 900 $1.5 billion. 754 Average capital expenditure ($bn) 1.5 0 3.0 1.6 Average free cash flow for the firm (FCFF) ($bn) 1.8 0 3.0 1.7 2014 average 2013 average Source: Deloitte analysis based on data from Bloomberg

The Deloitte M&A Index H1 2015 | 11 Charts we like Figure 11. Market valuation over book value and total equity Figure 14. European Commission 2015 growth forecasts capital of non-financial constituents of the Bloomberg World (annual percentage change in real GDP) Index (2000-14) 100% 3.0% 90% 2.5% 80% 2.0% 70% 1.5% 60% 1.0% 50% 0.5% 40% y 30% UK EU 20% inlandanceItal Spainozone 10% Belgium F Fr ortugal 0% Germany P Eur 2000 01 02 03 04 05 06 07 08 09 10 11 12 132014 Netherlands Total equity including minority interest and preferred equity Autumn 2014 forecast Winter 2015 forecast Market valuation over book value Source: European Commission Sources: Deloitte analysis based on data from Bloomberg Figure 12. Capital expenditures of non-financial constituents of Figure 15. Cash to assets vs. the debt to EBITDA of the STOXX Europe 600 Index and the S&P 500 Index (2000-14) non-financial constituents of the S&P Global 1200 (2000-14) $bn 700 12% 2.5 600 10% 2.0 500 8% 1.5 400 6% 300 4% 1.0 200 0.5 100 2% 0 0% 0 1 2 3 4 5 6 7 0.0 20002001200220032004 2005200620072008200920102011201220132014 200200 200200 200 200200 2002008200920102011201220132014 STOXX Europe 600 Capex S&P 500 Capex Cash to assets (LHS) Net debt to EBITDA (RHS) Source: Deloitte analysis based on data from Bloomberg Source: Deloitte analysis based on data from Bloomberg 5 Figure 13. M&A deal volumes and the S&P Global Figure 16. Global IPO volumes (2001-15 YTD) 1200 and Nasdaq Composite Index rebased to 2000 IPO volumes 250 3,000 200 150 2,500 100 2,000 50 1,500 0 1,000 2000 2001200220032004200520062007200820092010201120122013 2014 500 0 S&P Global 1200 Nasdaq Composite YTD Index 200120022003200420052006200720082009201020112012201320142015 Global M&A volume Source: Deloitte analysis based on data from Bloomberg Source: Deloitte analysis based on data from Thomson One Banker and Thomson One Banker 5. 2015 YTD as at 23 March 2015, IPOs live and in progress

12 | The Deloitte M&A Index H1 2015 Notes: In this publication, references to Deloitte are references to Deloitte LLP, the UK member firm of DTTL. About the Deloitte M&A Index The Deloitte M&A Index is a forward-looking indicator that forecasts future global M&A deal volumes and identifies the factors influencing conditions for dealmaking. The M&A Index is created from a composite of weighted market indicators from four major data sets: macroeconomic and key market indicators, funding and liquidity conditions, company fundamentals, valuations. Each quarter, these variables are tested for their statistical significance and relative relationships to M&A volumes. As a result, we have a dynamic and evolving model which allows Deloitte to identify the factors impacting dealmaking and enable us to project future M&A deal volumes. The Deloitte M&A Index has an accuracy rate of over 90% dating back to Q1 2008. About the authors Sriram Prakash and Irina Bolotnikova are the UK Deloitte Insight team for M&A and New Growth, based in London. Haranath Sriyapureddy, Abhimanyu Yadav and Sukeerth Thodimaladinna are research analysts in the Business Research Center, at DTTL. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. © 2015 Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198. Designed and produced by The Creative Studio at Deloitte, London. 42952A