Q2 2014 The Deloitte M&A Index

The Deloitte M&AIndexQ2 2014 Growth is back on the corporate agenda Contacts Iain Macmillan Key points Head of UK M&A • Deloitte forecasts a strong resurgence in deal volumes for Q2 2014, bolstered by strong 020 7007 2975 [email protected] economic figures from the US and Europe. • We expect the global deal volumes to reach nearly 8,000 deals by the end of Q2 2014, up by Sriram Prakash 10% for the same period in 2013. Head of M&A Insight • More than $500 billion worth of deals were announced just in the first two months of 2014. 020 7303 3155 It appears growth is firmly back on the corporate agenda. [email protected] • The S&P 1200 share price index currently stands close to its pre‑crisis high, however revenue growth has been declining since 2012. With confidence levels recovering, M&A activity provides a compelling way to enhance revenues and profits. > Figure 1. The Deloitte M&A Index Global M&A deal volumes 9,500 Q2 2014 M&A 9,000 deal forecast 8,500 8200 8,000 7,500 7850 7,000 6,500 6,000 5,500 5,000 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 Quarter Deloitte M&A Index (projection) Actual M&A deal volume (actuals) 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 Deloitte M&A Index has an accuracy rate of over 90 per cent dating back to Q1 2008.

2 | Deloitte M&A Index Q2 2014 Factors influencing M&A The Deloitte M&A Index has highlighted a number of variables that impact M&A deal volumes: Policy uncertainty falls Figure 2. Global policy uncertainty (Q1 2007-Q1 2014) Corporate sector fundamentals are strong, Index M&A Deals however economic uncertainty over the last 250 12,000 few years significantly dampened corporate risk appetite. In the previous editions of the 200 10,000 Deloitte M&A Index we argued that until market 8,000 sentiment improves, companies would not take 150 on greater risk. On the policy front, there have 6,000 been a number of positive developments such as 100 the US deal on debt ceiling, decisive actions by 4,000 EU leaders to manage the Euro crisis and the UK 50 2,000 avoiding a double dip recession. 0 0 Policy uncertainty was one of the variables that strongly featured in our Q2 2014 projection 2007 Q12007 Q22007 Q32007 Q42008 Q12008 Q22008 Q32008 Q42009 Q12009 Q22009 Q32009 Q42010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q42012 Q12012 Q22012 Q32012 Q42013 Q12013 Q22013 Q32013 Q42014 Q1 calculations. There is an inverse relationship between macroeconomic policy uncertainty Quarter and M&A volumes. In recent months, policy Weighted Index M&A Deals uncertainty has been falling steadily and if this continues, we can expect an uptick in M&A Source: Policyuncertainty.com, Thomson M&A, Deloitte analysis volumes in the coming quarters. *Weighted index is a weighted score for US, Europe and Chinese uncertainty index. IPO markets are booming Figure 3. Global IPO volume and issuance (US$bn) (Q1 2009-Q1 2014) The recent boom in the global IPO market is a olume V IPO issuance strong indicator of increasing market confidence. (US$bn) In Q1 2014 IPO levels reached 40 per cent of total 1,400 180 for 2013. If this trend continues, we can expect a 1,200 160 record year for IPOs. While technology IPOs have 140 grabbed the headlines, it is encouraging that in 1,000 120 2013 IPO listings were spread across a number 800 100 of sectors, suggesting that growth prospects are 80 well distributed across the economy. 600 60 400 According to Dealogic, 2013 was the most 40 200 active year in recent record for Private Equity (PE) 20 backed IPOs. There were 182 PE backed IPOs that 0 0 raised a total of $56.4 billion. With successful exits underway, we expect Private Equity to start 2009 Q12009 Q22009 Q32009 Q42010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q42012 Q12012 Q22012 Q32012 Q42013 Q12013 Q22013 Q32013 Q42014 Q1 investing some of its record levels of ‘dry powder’, which Preqin estimates currently stands at Quarter $1.067 trillion. Sum of Proceeds Count of Issuer Note: Q1 2014 data as at 18 March, 2014 Source: Thomson Reuters, Deloitte analysis

Deloitte M&A Index Q2 2014 | 3 Factors influencing M&A Pressure on revenue growth Figure 4. Corporate revenue growth rate vs. share price index (S&P 1200) The S&P 1200 share price index currently stands S&P 1200 index Revenue close to its pre‑crisis high; however revenue Growth Rate (%) growth has been declining since 2012 at a rate of 2,000 20 3%. Companies will be under pressure to maintain 1,800 15 their share price performance. At the same time, 1,600 1,400 10 S&P 1200 non‑financial companies are sitting on 1,200 record piles of cash and the net debt to EBITDA 5 1,000 ratio for US and European companies is 18% and 800 0 8% below their 10‑year average respectively. 600 -5 With confidence levels recovering, M&A activity 400 provides a compelling way to enhance revenues. 200 -10 0 -15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year YoY Revenue Growth Rate (%) S&P 1200 index Source: Bloomberg, Deloitte analysis Changes to the political landscape could Figure 5. Global political scenario – 2014 influence corporate risk and investment appetite General Cases of social elections due unrest and With 21 general elections coming up in 2014, in 2014. emerging crisis. we expect changes to the political landscape may have an impact on corporate risk and investment appetite. Major elections include ones in the key emerging markets of India and Brazil, congressional elections in the US, parliamentary elections in EU and the Scottish referendum. Global Crisis/Social Unrest Major Elections • Ukrainian crisis • Europe – Belgium, Hungary, Georgia, Romania, Slovakia, • Social unrest in Turkey, Egypt, Sweden, Moldova, Lithuania, Turkey, EU Elections Libya, Syria, Argentina • Americas – US Congressional, Brazil, Columbia, Uruguay • Asia Pacific – India, Indonesia, Bangladesh, Fiji, New Zealand • Africa – South Africa, Libya Source: Deloitte analysis

4 | Deloitte M&A Index Q2 2014 Corporate barometer We observed two significant changes in S&P 1200 Figure 6. Company fundamentals (S&P Global 1200) company fundamentals. First there was a sharp (Q3 2013 vs. Q4 2013 average) decline in average revenue growth, which fell by Average Cash in Hand (US$bn) 4.3% year‑on‑year in Q4 2013. This was partly 6.2 due to the severe weather conditions in the US 0 10 which resulted in unused inventories. 5.3 Average EPS 1.1 0 1.5 0.7 Second, average cash in hand fell from YoY Average revenue growth $6.2 billion to $5.3 billion. Some of the 2.0 cash was spent on M&A. Global deals in -5 5 Q4 2013 amounted to $521 billion. -4.3 Average dividend paid (US$m) 201 0 250 144 Companies also increased their average capital Average capital expenditure (US$m) expenditure from $455 million to $492 million, 455 suggesting a more positive investment outlook 400 500 and confidence in their balance sheet strength. 492 Average FCFF (US$m) 543 500 700 656 Q3 2013 average Q4 2013 average Source: Bloomberg, Deloitte analysis

Deloitte M&A Index Q2 2014 | 5 Geographies The US continues to lead the resurgence Figure 7. Global cash holding pattern as per geographies** Industrial production in February 2014 grew at US$ million the fastest rate in six months – a positive sign 3,500 business investment may take off in 2014. 3,000 US companies in S&P 1200 are sitting on reserves 2,500 of $1.53 trillion, which is 51% of the total cash reserves of the index constituents. 2,000 1,500 US companies have started to become more active in global M&A markets. In Q1 2014, 1,000 they were involved in 38% of all global M&A 500 transactions up from 34% in Q4 2013. 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* Year Asia-Pacific Europe North America South America Source: Bloomberg, Deloitte analysis **Includes S&P 1200 non-financial companies *2013 figures are for the companies which have reported as of date of publication. An unexpected rebound in European deals Figure 8. Region-wise M&A values Q1 2013 vs. Q1 2014 European companies were involved in 35% of all re of global deal values % of sha global deals by disclosed values in Q1 2014, which is up from 27% during same period in 2013. 60 53 55 This trend is consistent with the 15% drop in 50 cash reserves of the European companies from 40 $970 billion to $822 billion. 35 30 27 21 22 20 10 6 4 11 0 US Europe Asia-Pacific South America MEA Q1 2013 Q1 2014 Source: Thomson Reuters, Deloitte analysis Note: This data set includes all deals where a company from a particular geography was involved either as a buyer or seller. Q1 2014 figures are based on figures disclosed as of date of publication.

6 | Deloitte M&A Index Q2 2014 Sectors We expect M&A activities to be strong in the following sectors: Technology, Media & Telecommunications Figure 9. Deal values Q1 2013 vs. Q1 2014 (TMT) sector US$ billion Technology, Media and Telecommunications companies are at the forefront of M&A activities. The ongoing revolution in media consumption 200 habits is likely to fuel convergence inspired mergers. 174.3 We expect both vertical and cross‑industry 150 convergence deals. Successful mergers could create whole new market categories. 105.7 107.9 100 82.1 75.6 62.1 62.7 65.1 50 42.8 14.2 0 TMT Pharmaceuticals Industrials Energy, Mining Consumer and Life Sciences & Chemicals & Utilities Business Q1 2013 Q1 2014 Source: Mergermarket, Deloitte analysis *Deal values for Q1 2014 based on deals disclosed as of date of publication. Pharmaceuticals and Life Sciences Figure 10. Average PE valuations as per sectors Pharmaceutical and Life Sciences companies 2013 Average PE are once again under pressure due to weak R&D pipelines. Indeed for some companies 27 Real Estate replenishing their pipelines is now a matter of Technology survival. Historically they have responded through 25 acquisitions and we expect this trend to continue Professional with bolt‑on deals, rather than block‑busters. Services Life Sciences 23 We also expect them to divest non‑core assets to Media free up cash for pipeline related acquisitions. Manufacturing 21 Consumer 19 Business E&R 17 Telecom 15 15 17 19 21 23 25 27 Average PE – previous 10 years (2003-2012) Overvalued Undervalued Source: Thomson M&A, Deloitte analysis *Bubble size denotes the deal volumes

Deloitte M&A Index Q2 2014 | 7 Charts we like Figure 11. Growth prospects in major economies Figure 12. Cash position S&P 1200 sectors 200 US$ billion 180 3,000 160 2,500 140 2,000 120 100 1,500 80 1,000 60 500 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 0 13 13 13 13 13 13 13 13 13 13 14 14 14 2008 2009 2010 2011 2012 2013 UK Euro Area US BRICS TMT Energy & Resources Life Sciences *Consensus forecasts for 2014 GDP growth, March 2013 = 100 Manufacturing Consumer business Source: Economics & Markets, Deloitte Research Source: Bloomberg, Deloitte analysis Figure 13. S&P 1200 buybacks vs. dividends (2000-2013) Figure 14. S&P 1200 short vs. long term debt US$ million % 700,000 70 600,000 60 500,000 Widening 400,000 50 Gap 300,000 40 200,000 100,000 30 0 20 2000 2001 20022003 2004 20052006 20072008 2009 20102011 20122013 2000200020012001200220022003200320042004200520052006200620072007200820082009200920102010201120112012201220132013 Buybacks Dividends Long term debt as % of total debt Short term debt as % of total debt Source: Bloomberg, Deloitte analysis Source: Bloomberg, Deloitte analysis Figure 15. S&P 1200 M&A spend as % of market capitalisation Figure 16. Average deal P/E multiples vs. average deal premium (%) (2001-2013) % Premium % PE (x) 6.0 26 30 5.0 24 25 22 4.0 20 20 3.0 18 15 2.0 16 10 14 1.0 12 5 0.0 66 10 0 200020002001200120022002200320032004200420052005200200200720072008200820092009201020102011201120122012201320132001200220032004200520062007200820092010201120122013 United States Europe Average Valuation (P/E) (RHS) Average Deal Premium (LHS) Source: Bloomberg, Deloitte analysis Source: Thomson Reuters, Deloitte analysis

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 • S&P 1200 company fundamentals • Valuations trends 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 per cent dating back to Q1 2008. Notes: In this publication, references to Deloitte are references to Deloitte LLP, the UK member firm of DTTL. About the authors Sriram Prakash and Russell Shoult are from the Deloitte M&A Insight team, based in London, UK. Ravi Sekar, Haranath Sriyapureddy, and Abhimanyu Yadav are M&A analysts in the Business Research Center, at Deloitte (DTTL) in India. 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. © 2014 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. 34082A