The Deloitte M&A Index Q3 2014 Rising ‘animal spirits’ continue to stoke M&A activity Contacts Key points • Following the sharp rebound in deal volumes in Q2, Deloitte forecasts a continued uptick Iain Macmillan Head of UK M&A for Q3 2014, bolstered by strong economic results and renewed market confidence. 020 7007 2975 [email protected] • We expect global deal volumes to reach around 8,350 by the end of Q3 2014, up 9% over the same period in 2013. Sriram Prakash Head of M&A Insight • The IPO boom continues and in H1 2014 companies have raised proceeds of 020 7303 3155 $103 billion which is a 20 per cent increase over the same period in 2013. [email protected] However, our analysis shows IPO proceeds earmarked for investment in growth are declining, which may prompt closer investor scrutiny. • The animal spirits are spilling over to M&A markets and we are seeing the return of hostile bids. Figure 1. The Deloitte M&A Index Global M&A deal volumes Q3 2014 9,500 M&A deal forecast 9,000 8,500 High: 8600 Mid: 8350 8,000 Low: 8100 7,500 7,000 6,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 Quarter Deloitte M&A Index (projection) M&A deal volumes (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% dating back to Q1 2008.

2 | The Deloitte M&A Index Q3 2014 Factors influencing M&A in Q3 2014 The IPO boom continues… Figure 2. Global IPO volume and issuance ($bn) (H1 2007 – H1 2014) The IPO market continues to perform strongly Deal volumes IPO issuance ($bn) underlining the continued market confidence 3,000 450 while a number of high profile listings are still 2,500 400 350 due to take place this year across a number 2,000 300 of sectors. Year to date, over 700 companies 1,500 250 200 have come to market globally totalling 53% 1,000 150 of 2013 volumes, the highest recorded first 500 100 50 half IPO volumes since 2011. Companies have 0 0 raised proceeds of $103 billion which is a 20 per cent increase over the same period 2007 H12007 H22008 H12008 H22009 H12009 H22010 H12010 H22011 H12011 H22012 H12012 H22013 H12013 H22014 H1 in 2013. Year Volumes Sum of proceeds Source: Thomson Reuters; Deloitte analysis …however, only small amounts of the Figure 3. YoY percentage change in IPO proceeds (2013 v 2014) IPO proceeds are being channelled towards growth Repay debt -14.1% An interesting feature of the IPO surge in 2014 is that only a modest amount of the proceeds are Working Capital -1.1% being channelled towards growth. When we analysed the disclosed use of the proceeds, we Capex -0.4% observed that in 2014 only 14.5% is earmarked for capex activities, 1% for working capital Payment- -0.3% and 8% for future M&A activities. In addition, Shareholders we found nearly 34% of the proceeds were Others -0.1% channelled towards general corporate purposes, an 8% increase over 2013. It seems companies Investments 0.7% are taking advantage of the favourable conditions to raise equity, but have not yet Balance Sheet 1.1% decided how they want to use the proceeds. However, there are significant variations across R&D 1.4% geographies. Companies listing in Asia‑Pacific have earmarked nearly 37% for capex, as compared to M&A 2.6% 21% by North American companies and a meagre 4% by European companies. On the other hand, General Corp. Purp. 7.9% European companies have earmarked around -15-10 -5 0510 11% for M&A activities, compared with just 0.4% for North American companies. % change of total proceeds (percentage points) With recent turbulence in the post‑IPO performance Source: Thomson Reuters; Deloitte analysis of some companies, as well as some withdrawals, we expect investors may require companies to show greater transparency and clarity on how they plan to use proceeds to fund growth.

3 | The Deloitte M&A Index Q3 2014 Factors influencing M&A in Q3 2014 Withdrawn deals Figure 4. Withdrawn deal volumes and disclosed deal values ($bn) The M&A market saw $216 billion of (Q1 2008 – Q2 2014) withdrawn deals within the first six months of Deal volumes Disclosed deal values ($bn) the year. Deloitte estimates that on average 450 180 around 3% of deals are withdrawn each year 400 160 and 2014 is no different. The key difference 350 140 this year is that a handful of high profile deals 300 120 account for the majority of the withdrawn 250 100 deal values. For instance, one high profile 200 80 pharmaceutical deal alone accounts for 150 60 43% of total withdrawn deals by value. 100 40 50 20 0 0 2008 Q12008 Q22008 Q32008 Q42009 Q12009 Q22009 Q32009 Q42010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q42012 Q12012 Q22012 Q32012 Q42013 Q12013 Q22013 Q32013 Q42014 Q12014 Q2 Quarter Deal volumes Disclosed deal values ($bn) Source: Thomson Reuters; Deloitte analysis Animal spirits Figure 5. Disclosed deal values and deal premiums of withdrawn deals Such high profile deal withdrawals also (Q1 2010 – Q2 2014) point to a trend of rising hostile bids. It is Disclosed deal value ($bn) Deal Premium indeed striking that of the deals that were 140 60 withdrawn this year, the average premium 120 offered was 27x compared with the average 50 deal premium of just 13x for announced 100 40 deals. Looking ahead, it seems likely that 80 getting deals to completion, particularly for 30 60 larger deals, is going to get more complex 20 due to increased political and regulatory 40 scrutiny, wider stakeholder interests and rising 20 10 valuations. Going hostile is an expensive 0 0 alternative and fraught with problems, but it also indicates that animal spirits are returning. 2010 Q12010 Q12010 Q22010 Q22010 Q32010 Q32010 Q42010 Q42011 Q12011 Q12011 Q22011 Q22011 Q32011 Q32011 Q42011 Q42012 Q12012 Q12012 Q22012 Q22012 Q32012 Q32012 Q42012 Q42013 Q12013 Q12013 Q22013 Q22013 Q32013 Q32013 Q42013 Q42014 Q12014 Q12014 Q22014 Q2 Quarter Disclosed deal value ($bn) Deal Premium Source: Thomson Reuters; Deloitte analysis

4 | The Deloitte M&A Index Q3 2014 5 | Corporate barometer Analysis of the S&P Global 1200 company Figure 6. Company fundamentals (S&P Global 1200) (Q4 2013 vs. fundamentals yields four key insights. Q1 2014 average) First, average revenue growth fell from Average cash in hand ($bn) 0.2% in Q4 2013 to ‑0.2% in Q1 2014 with 6.2 corporates struggling to keep pace with 0 10 analyst earnings estimates. 6.5 Second, overall average cash in hand Average EPS ($) increased from $6.2 billion in Q4 2013 to 0.7 $6.5 billion in Q1 2014. However, average 0 1.5 cash held by US corporates fell by $209 million per company while European and Asia‑Pacific 0.9 corporates increased their cash reserves by YoY average revenue growth (%) $372 million and $1.6 billion respectively. 0.2 The drop in US cash reserves can be attributed 5 both to severe weather disrupting output and -5 a two‑speed recovery in the M&A markets, -0.2 with US companies leading the way. Average dividend paid ($m) Third, average dividend payments increased 164 from $164 million in Q4 2013 to $188 million 0 250 in Q1 2014 continuing the trend of returning 188 cash to shareholders. Average capital expenditure ($m) Finally, average capital expenditure saw a 535 sharp fall from $535 million to $403 million 600 after four consecutive quarters of increased 400 investment. Much of this fall can be attributed 403 to energy and resources companies shrinking Average FCFF ($m) their capital intensive projects. 542 400 600 420 Q4 2013 average Q1 2014 average Source: Bloomberg; Deloitte analysis

5 | The Deloitte M&A Index Q3 2014 Geographies Two‑speed M&A recovery Figure 7. US dealmaking versus other geographic regions (Q1 2013 – Q2 2014). Since Q1 2013, North America has been gaining M&A market share over other Market share (%) geographic regions. Their market share has 60 increased from 37% of involvement in global M&A deal volumes to 43% in Q2 2014. 50 North American firms have also been involved 40 in 58% ($427 billion) of all disclosed deals by value in Q2 2014. 30 Despite the severe weather related setbacks 20 which saw the US economy shrink 2.9% in the 10 first quarter, US companies are at the forefront of dealmaking and have record levels of cash 0 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 held overseas. Specifically, US acquisitions Quarter account for 55% ($404 billion) of all disclosed deal values in Q2 2014, more than any other United States Europe Asia-Pacific geographic region. Africa & Middle East South America Source: Thomson Reuters; Deloitte analysis Europe a target for US companies Figure 8. US acquisitions into Europe (Q1 2008 – Q2 2014) After years of tepid growth, European Deal volumes Disclosed deal values ($bn) companies appear sub‑scale compared to 250 80 their peers and may now be attractive M&A 70 targets for global competitors. US companies 200 60 are particularly acquisitive; in Q2 2014 they recorded the highest deal values into Europe 150 50 since Q2 2012. Much of this increased deal 40 activity can be attributed to the large cash 100 30 reserves that US companies are holding 50 20 overseas and, with high tax levies imposed 10 on repatriating cash back to US, they have 0 0 started spending it more aggressively in Europe. Many European countries have lower 2008 Q12008 Q22008 Q32008 Q42009 Q12009 Q22009 Q32009 Q42010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q42012 Q12012 Q22012 Q32012 Q42013 Q12013 Q22013 Q32013 Q42014 Q12014 Q2 corporate tax rates than in the US making the prospect of tax inversion particularly attractive. Deal volumes Disclosed deal values ($bn) Source: Thomson Reuters; Deloitte analysis Year‑to‑date, US companies have spent $89 billion on European companies and we expect them to spend in excess of $150 billion on European deals this year.

6 | The Deloitte M&A Index Q3 2014 7 | Sectors Positive signs of M&A recovery across Figure 9. Global deal values by sector (H1 2013 v H1 2014) sectors Disclosed deal values (US$bn) M&A deal volumes and disclosed deal values 350 have increased in every major industry 323 sector except for financial services in 300 293 H1 2014 compared to H1 2013, signalling a 250 251 step‑change in the M&A environment. 200 167 158 The biggest benefactor of increasing deal 150 151 activity has been the TMT sector which has 145 seen H1 2014 deal volumes increasing 18% 100 102 106 year‑on‑year and disclosed deal values up 50 53 77 69 187%. The TMT sector is currently sitting on cash piles of over $1 trillion and continued 0 & & M&A and consolidation is highly likely. media FinancialservicesConsumerbusiness Energy resources The life sciences and healthcare sector has Life sciences& healthcareTechnology,telecomms seen a significant increase in dealmaking with Manufacturing disclosed deal values up 369% year‑on‑year. Sector The patent ‘cliff’ is one of the primary drivers 2013 H1 2014 H1 behind this surge. The top 12 pharmaceutical companies globally are due to be hardest hit Source: Thomson Reuters; Deloitte analysis and are expected to lose $50 billion of global 1 sales. Companies are also using M&A to focus on preferred therapeutic areas and are Figure 10. Global deal values and volumes in life sciences and healthcare sector doing so through asset swaps, divestments of (Q1 2008 vs. Q2 2014) non‑core businesses and partnerships. Deal volumes Disclosed deal values ($bn) 600 250 500 200 400 150 300 0 10 200 100 50 - 0 2008 Q12008 Q22008 Q32008 Q42009 Q12009 Q22009 Q32009 Q42010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q42012 Q12012 Q22012 Q32012 Q42013 Q12013 Q22013 Q32013 Q42014 Q12014 Q2 Quarter Deal volumes Disclosed deal values ($bn) Source: Thomson Reuters; Deloitte analysis 1 Evaluate, Evaluate Pharma World Preview 2013

7 | The Deloitte M&A Index Q3 2014 Charts we like Figure 11. UK unemployment figures (2000 – 2014E) Figure 12. S&P Global 1200 headcount growth (2001 – 2014YTD) Unemployment numbers (million) Unemployment (%) Headcount growth (%) 2.8 9.0 40% 2.6 2.4 8.0 30% 2.2 7.0 20% 2 1.8 6.0 10% 1.6 0% 1.4 5.0 2001 2005 2007200920112 1.2 -10% 2003 013 1 4.0 -20% 2 4 0 1 E Year 01 2001 200 2003 200 2005 2006 2007 2008 2009 2 201 2012 2013 2014 Headcount Year Unemployment number (millions) Unemployment % Source: Bloomberg; Deloitte analysis Source: Economist Intelligence Unit; Deloitte analysis Figure 13. S&P Global 1200 cash by geography Figure 14. S&P Global 1200 revenue growth vs. share price (Q1 2008 – Q1 2014) (2001 – 2013) Corporate cash (US$m) S&P Global 1200 index Revenue growth (%) 1,200,000 2,000 20% 1,800 1,000,000 1,600 15% 1,400 10% 800,000 1,200 600,000 1,000 5% 800 400,000 600 0% 400 -5% 200,000 200 – 0 -10% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2008 Q12008 Q22008 Q32008 Q42009 Q12009 Q22009 Q32009 Q42010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q42012 Q12012 Q22012 Q32012 Q42013 Q12013 Q22013 Q32013 Q42014 Q1Year Asia-Pacific Europe US S&P Global 1200 Index Revenue Growth (%) Source: Bloomberg; Deloitte analysis Source: Bloomberg; Deloitte analysis Figure 15. S&P Global 1200 spend on dividends vs. capex Figure 16. S&P Global 1200 M&A spend as % of market cap (2000 – YTD2014) (2000 – 2013) Cash usage (US$bn) S&P Global 1200 M&A spend 1,800 as % of market cap 1,600 10 1,400 9 1,200 8 7 1,000 6 800 5 600 4 400 3 200 2 1 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year Year Dividends CAPEX Europe United States Source: Bloomberg; Deloitte analysis Source: Bloomberg; Deloitte analysis

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 Russell Shoult are the UK Deloitte Insight team for M&A, based in London. Haranath Sriyapureddy, Abhimanyu Yadav and Sukeerth Thodimaladinna are M&A 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. © 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. 36044A