Q3 2015 The Deloitte M&A Index

The Deloitte M&A Index Q3 2015 US companies leading surge in M&A Contacts Key points • The first half of 2015 has emerged as one of the strongest for M&A, with more Iain Macmillan Head of UK M&A than $1.8 trillion worth of deals announced globally, a 22% increase over H1 2014. 020 7007 2975 US corporates are leading this surge fuelled by a strengthening dollar, low funding [email protected] costs and strong earnings. Sriram Prakash • Growth markets are making an impact and in 2014 for the first time outbound Head of M&A M&A from growth markets into G7 countries surpassed inbound M&A from the G7 and Growth Insight 020 7303 3155 into those markets, with China leading the way. The recent Chinese IPO boom is [email protected] expected to boost M&A activity by publicly-listed companies. • However, in Europe despite favourable credit conditions and strong corporate earnings, political and currency risks are weakening confidence among European companies. • Taking these factors into consideration, the Deloitte M&A Index predicts that M&A activity in Q3 will remain at a similar level to Q2. • We expect market conditions to remain favourable and boards to continue reorganising to pursue growth. Our analysis shows that over the last six years, 63 of the FTSE 100 companies had replaced their CEO. A key aspect of this reorganisation is a shift towards CEOs whose skills could be more suited to pursuing growth and M&A opportunities. Figure 1. The Deloitte M&A Index Global M&A deal volumes Q3 2015 M&A 12,000 deal forecast 11,500 11,000 High: 10,700 10,500 Mid: 10,500 10,000 Low: 10,300 9,500 9,000 8,500 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 Deloitte M&A Index (projections) M&A deal volumes (actuals) Last twelve months deal volumes 45,000 Q3 2015 M&A 42,500 deal forecast 40,000 37,500 35,000 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 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 2015 Factors influencing M&A in Q3 2015 Political and currency risks undermine Figure 2. Domestic and cross-border European M&A deal values 15 YTD* European corporate confidence ($bn), 2012- The European Commission is forecasting 1,200 1.5 per cent growth in the euro area in 2015, the highest since 2011. This positive outlook is 1,000 220 mirrored by strong corporate sector earnings that will further benefit from potential increases 800 181 206 in exports due to the weakening euro. 122 600 118 The European Central Bank’s quantitative easing 97 400 201 programme is resulting in a decline in yields of 597 646 Disclosed deal values ($bn) 417 44 euro denominated bonds and an increase in 200 asset valuations of European companies. 232 0 2012 2013 2014 2015 YTD This in turn is prompting European businesses Domestic deal values to sell to overseas acquirers. So far this year Outbound deal values $201 billion worth of inbound deals have been Inbound deal values announced, almost surpassing the $220 billion *2015 YTD as at 23 June 2015 announced during the whole of 2014. Source: Deloitte analysis based on data from Thomson One Banker However, with the euro depreciating by 18 per cent against the dollar since the beginning of 2014, it has become more expensive for European companies to make overseas acquisitions. So far this year only $44 billion worth of outbound deals have been announced by European companies, much lower than the $206 billion in 2014. Against this backdrop, political risks in Europe have also heightened, and together with currency pressures, are dampening corporate confidence for acquisitions.

The Deloitte M&A Index Q3 2015 | 3 Factors influencing M&A in Q3 2015 A surge in US M&A Figure 3. S&P500 FCF and dividend yields and Bloomberg corporate bond 15 YTD In past editions, we highlighted that while yields, 2010- global indices were hitting record highs, 10% annual revenue growth for their constituent companies is challenged, putting CEOs under 8% pressure from investors. 6% S&P 500 non-financial constituent companies 4% had $1.62 trillion in cash reserves for the year 2014. The free cash flow yield for the S&P 500 2% was 5.22%, the dividend yield 2% and the 0% Bloomberg USD corporate bond yield 3.11%. 2010 2011 2012 2013 2014 Current funding conditions and cash positions S&P 500 FCF yield should give potential acquirers the confidence Bloomberg USD High Yield Corporate Bond Yield to do M&A, since they can fund acquisitions Bloomberg USD Investment Grade Corporate Bond Yield by borrowing at favourable rates and service S&P 500 dividend yield debt payments using free cash flow. Cash reserves of non-financial constituents of the S&P500 ($bn), 2010-14 There has also been a rise in activist shareholders, who are putting pressure on $1,178 $1,308 $1,424 $1,612 $1,624 boards to pursue growth or give cash back $ $ $ $ $ to shareholders. Meanwhile some companies are taking more aggressive measures while pursuing M&A and we are seeing an increase 2010 2011 2012 2013 2014 in hostile deal announcements. So far this year $240 billion unsolicited deals have been Source: Deloitte analysis based on data from Bloomberg announced globally, the highest levels since 2007.

4 | The Deloitte M&A Index Q3 2015 Factors influencing M&A in Q3 2015 China’s IPO boom could fuel M&A Figure 4. Chinese outbound M&A deal values by status of acquirer, 15 YTD China is in the midst of an unprecedented IPO 2012- boom and recent developments such as the Disclosed deal values ($bn) launch of the Shanghai-Hong Kong Stock Connect 50 are creating windows for Chinese companies to 40 tap into the institutional investor market. 30 20 Increasingly these companies are using the 10 IPO proceeds to pursue their M&A ambitions. 0 2012 2013 2014 2015 So far this year almost 40 per cent of international YTD acquisitions were done by publicly-listed Outbound M&A transactions by Chinese public companies ($bn) companies, the highest percentage for the last five Outbound M&A transactions by Chinese private companies ($bn) years. Number of Chinese IPOs, 2012-15 YTD 255 A slowing Chinese economy is spurring companies 215 2014 206 to seek growth through overseas acquisitions. 2012 Chinese companies have announced $42.4 billion 2015 YTD worth of overseas deals, of which publicly-listed companies accounted for $25.6 billion, outpacing 114 private sector companies for the first time. 2013 Source: Deloitte analysis based on data from Thomson One Banker

The Deloitte M&A Index Q3 2015 | 5 Spotlight on CEOs CEOs background and corporate appetite The changing skills of CEOs has had an impact for M&A on corporate attitudes towards M&A. In the One of the consequences of the global financial last six years, FTSE 100 companies spent an crisis was the realignment of many boardrooms. estimated $430 billion on acquisitions, and Deloitte analysis shows that since 2009, 63 of the CEOs with a non-financial background the FTSE 100 companies replaced their CEOs. accounted for $291 billion, which represents two-thirds of total spending. At the beginning of 2009, only 45 per cent of FTSE 100 CEOs had a financial background. This increased to 52 per cent in 2012 in the middle of the recovery when financial prudency was required. As market conditions started improving, CEOs with a more diverse set of skills were being recruited and CEOs with a financial background has fallen back to 47 per cent. Figure 5. Total M&A spending by constituents of FTSE100 ($bn) and background of CEOs of FTSE100 companies, 2009-15 YTD* 2014-15 YTD CEOs without $135.1 financial bn background 2012-13 63 50% $50.1 companies 50% bn have changed $40.2 $47.4 their CEO CEOs with bn bn since 2009 financial background CEOs with non-financial backgrounds accounted for two-thirds of total spending on M&A in the last six years *While determining whether a CEO has a financial background we considered prior work experience, professional qualifications and educational background. ce: Deloitte analysis based on data from Thomson One Banker, Bloomberg and BoardEx Sour

6 | The Deloitte M&A Index Q3 2015 Spotlight on growth markets Rebalancing the M&A flows Figure 6. M&A transactions flows – G7 vs growth markets ($bn), In 2014, for the first time cross-border 2007-15 YTD outbound M&A investment from growth G7 advanced economies Growth markets outbound deal markets into G7 countries exceeded G7 outbound deal values into the values into the G7 advanced outbound M&A investment into growth growth markets economies markets. Last year growth market companies 18.8 2015 YTD 28.7 announced $45 billion worth of deals into 36.5 2014 44.6 G7 countries, whereas companies from G7 countries announced only $37 billion worth 55.1 2013 22.1 of M&A deals into growth markets. 48.5 2012 34.9 This trend is continuing in 2015 and to date 67.8 2011 30.9 nearly $29 billion worth of deals have been 57.8 2010 40.9 announced by growth market companies 39.0 2009 21.2 in G7 countries, whereas only $19 billion of outbound deals were announced by G7 in 65.1 2008 44.1 growth markets. 112.2 2007 98.0 While China is the most active growth market 120 100 80 60 40 20 0 020406080 100 120 Disclosed deal values ($bn) dealmaker, we can expect to see more deal Note: The G7 comprises of Canada, France, Italy, Germany, Japan, UK and USA. flows from countries such as India, Mexico The growth markets are defined as: Brazil, China (incl. Hong Kong), Czech Republic, and Turkey in future. Growth markets will Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Peru, Philippines, continue to offer growth prospects, such as Poland, Russian Federation, South Africa, Taiwan, Thailand, Turkey, Saudi Arabia, ASEAN Economic Community (AEC) which United Arab Emirates. We define growth markets as countries referenced in The Economist as emerging markets in 2012. aims to integrate the region economically and Source: Deloitte analysis based on data from Thomson One Banker create the world’s seventh largest economy.

The Deloitte M&A Index Q3 2015 | 7 Corporate barometer Analysis of S&P Global 1200 company data: Figure 7. Company fundamentals, S&P Global 1200: Q1 2014 vs Q1 2015 average Average revenue growth fell from 0.3 per Average cash in hand ($bn) cent in the first quarter of 2014 to negative 6.35 6.2 per cent for the corresponding period 0 10 of 2015. 6.39 The average cash in hand per company Average EPS ($) decreased from $6.39 billion at the end of 0.77 the first quarter 2014 to $6.35 billion at the 0 1.0 end of the first quarter of 2015. The free cash 0.82 flow for the firm (FCFF) across the S&P Global 1200 shows a similar pattern, averaging Year-on-year average revenue growth (%) $401.5 million in Q1 2014 and $351.6 million 0.3% in Q1 2015. -7.0% 7.0% The average dividend payments per company -6.2% increased from $182 million in Q1 2014 to $201 million in Q1 2015, continuing the trend Average dividend paid ($m) of returning cash to shareholders. 182 100 300 The average EPS decreased from $0.82 in 201 Q1 2014 to $0.77 in Q1 2015. Average capital expenditure ($m) Finally, average capital expenditure per 394.2 company fell slightly from $401 million to 0 800.0 $394.2 million. 401.0 Average free cash flow for the firm (FCFF) ($m) 351.6 0 800.0 401.5 = Q1 2015 Average = Q1 2014 Average Source: Deloitte analysis based on data from Bloomberg

8 | The Deloitte M&A Index Q3 2015 Geographies M&A trends in geographies Figure 8. Global deal values by region of acquirer and target ($bn), 15 YTD So far this year more than $1.8 trillion worth 2014- of deals have been announced, compared Disclosed deal values by region of acquirer ($bn) to $1.5 trillion in H1 2014. This is the result 1,000 of a surge in dealmaking by North American companies, which accounted for 50 per cent 800 of the announced deals globally. However, there has been a 6 per cent decline in global 600 M&A volumes compared to H1 2014. 400 There has also been a sharp pick up in Asia 200 – so far $535 billion worth of deals have been announced by Asia-Pacific acquirers, 0 compared to $384 billion in H1 2014. Africa/ Asia-Pacific Europe North South Middle East America America 0 Europe is fast becoming the preferred destination for inbound M&A investment. 200 So far this year $433 billion worth of deals have been announced, of which $147 billion 400 were from North American companies, representing 73 per cent of all cross-border 600 investment into Europe. 800 In contrast, European companies have been 1,000 less active as acquirers and have announced Disclosed deal values by region of target ($bn) only $276 billion worth of deals, representing a global share of just 15%, which is down H1 2014 H2 2014 2015 YTD from 27% in 2014. European outbound M&A Source: Deloitte analysis based on data from Thomson One Banker into North America has fallen dramatically and only $30 billion worth of deals have been announced so far in 2015 as compared to $156 billion for the whole 2014.

The Deloitte M&A Index Q3 2015 | 9 Sectors M&A sector trends Figure 9. Global deal values by target sector ($bn), 2014-15 YTD The surge in M&A has been led by the Life 450 Sciences and Healthcare (LSHC) and the 400 Telecoms, Media and Technology (TMT) 350 sectors. In the TMT sector, $434 billion worth 300 of deals have been announced, an increase of 250 44 per cent over H1 2014. TMT is followed by 200 the LSHC sector, where $304 billion of deals 150 have been announced, an increase of 37 per 100 cent over first half of 2014. Disclosed deal values ($bn)50 0 & e , Spotlight on pharmaceutical M&A gy ces Life Real The combination of challenging economic Business inancialServices Services Estateia andelecoms conditions and sector dynamics is driving ConsumerEnerResourF Healthcar ofessional echnologyMedT the surge in healthcare M&A. Some of the Sciences and Pr T Manufacturing key drivers include the rebuilding of drug portfolios and the disposing of non-core H1 2014 H2 2014 2015 YTD operations. In addition, companies are Source: Deloitte analysis based on data from Thomson One Banker consolidating to mitigate the expected cost pressures from governments and insurers and Figure 10. Total volumes and values of M&A involving pharmaceutical improve their operational efficiency. companies ($bn), 2000-15 YTD Deal volumes Disclosed deal values ($bn) So far in 2015, $200 billion worth of 900 300 acquisitions have been announced involving 750 250 pharmaceutical companies, the highest 600 200 H1 figure for well over a decade. This includes two hostile deals worth $77 billion announced 450 150 earlier this year. 300 100 150 50 The current M&A wave is likely to continue 0 0 until major pharmaceutical companies fully D align their portfolios and trim their product 200020012002200320042005200620072008200920102011201220132014 lines. Once the cycle is complete, we expect 2015 YT companies will pursue smaller deals with more Deal volumes Deal values ($bn) ce: Deloitte analysis based on data from Thomson One Banker innovative deal structures such as venturing Sour to tap into the opportunities brought by the convergence in some parts of the healthcare, insurance and technology sectors.

10 | The Deloitte M&A Index Q3 2015 Charts we like Figure 11. Euro denominated investment grade bond issuance: Figure 14. Yields to maturity of investment grade and high European domestic and inbound ($bn), 2014-15 YTD yield corporate bonds in euros and dollars (%), 2012-15 YTD 120 10% 100 8% 80 6% 60 4% 40 2% oceeds amount ($bn)20 0%Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Pr 0 12 12 12 12 13 13 13 13 14 14 14 14 15 15 Jan 14eb 14 Jun 14Jul 14Oct 14 Jan 15eb 15 Jun 15 Bloomberg EUR High Yield Corporate Bond Yield F Mar 14Apr 14May 14Aug 14Sep 14Nov 14Dec 14FMar 15Apr 15May 15 Bloomberg USD High Yield Corporate Bond Yield Bloomberg EUR Investment Grade European Corporate Domestic Inbound Bond Yield Bloomberg USD Investment Grade Corporate Bond Yield Source: Deloitte analysis based on data from Thomson One Banker Source: Deloitte analysis based on data from Bloomberg Figure 12. Euro denominated high yield bond issuance: Figure 15. STOXX® Europe 600 Index and P/E performance, European domestic and inbound ($bn), 2014-15 YTD 2014-15 YTD P/E 25 420 24 400 23 20 22 15 380 21 360 20 10 19 Index value340 18 5 320 17 oceeds amount ($bn) 16 Pr0 300 5 15 Jan 14b 14 Jun 14Jul 14 Oct 14 Jan 15b 15 Jun 15 Jan 14Feb 14Mar 14Apr 14Jun 14Jul 14Aug 14Sep 14Oct 14Nov 14Dec 14Jan1Feb 15Mar 15Apr 15Jun 15 Fe Mar 14Apr 14May 14Aug 14Sep 14Nov 14Dec 14FeMar 15Apr 15May 15 May 14 May 15 Domestic Inbound Index value Adjusted positive P/E Source: Deloitte analysis based on data from Thomson One Banker Source: Deloitte analysis based on data from Bloomberg Figure 13. Total volumes and disclosed deal values of Figure 16. Shanghai Stock Exchange Composite Index and unsolicited offers, 2007-15 YTD* Hong Kong Hang Seng Index price to earnings multiples Deal volumes Disclosed deal values ($bn) 25 70 300 20 60 242 240 250 15 50 200 10 40 150 5 30 93 0 20 132 49 100 10 32 16 50 44 51 Jan 14Feb 14Mar 14Apr 14May 14Jun 14Jul 14Aug 14Sep 14Oct 14Nov 14Dec 14Jan15Feb 15Mar 15Apr 15May 15Jun 15 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Shanghai Stock Exchange Composite Index Deal volumes Deal values ($bn) Hong Kong Hang Seng Index *2015 YTD as at 25 June 2015 Source: Deloitte analysis based on data from Bloomberg Source: Deloitte analysis based on data from Thomson One Banker

The Deloitte M&A Index Q3 2015 | 11 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. M&A volumes include M&A transactions for majority/remaining interest, minority stake purchases and leveraged buyouts. 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, based in London. Haranath Sriyapureddy, Sukeerth Thodimaladinna and Jugal Rajeshkumar Limbachiya are research analysts in the Client Research Center, at DTTL. The team would like to thank Abhimanyu Yadav for his contribution in production of the M&A Index.

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