The Deloitte M&A Index Q4 2014 Mega-deals lead the resurgence in M&A markets Key points Contacts • So far this year, companies have announced $2.5 trillion worth of M&A deals. This Iain Macmillan makes 2014 the best year for deals by value since 2007. This year will go down as Head of UK M&A and New Growth a year when mega-deals (> $10 billion) made a comeback and so far 26 such deals +44 (0) 20 7007 2975 have been announced amounting to $672 billion. [email protected] • We forecast global deal volumes in Q4 2014 to recover and reach around 8,500, which Sriram Prakash will make a total of around 31,500 for the year. Though less pronounced, it represents an Head of M&A increase of 3% over last year and would make 2014 the best year for volumes since 2011. and New Growth Insight +44 (0) 20 7303 3155 • Looking ahead to 2015, following the end of the US quantitative easing programme, [email protected] the pace of the US economic recovery is expected to continue. However other economies, including the Eurozone and many of the emerging markets are facing challenges. These diverging economic trajectories mean that the US companies could take advantage of an appreciating US dollar to pursue cross-border M&A deals. • Globally corporates are in a position of strength, they have record levels of cash reserves, have rebuilt balance sheets, stock market rallies have lifted their share prices and M&A spend as a percentage of market capitalisation remains lower than average. However the conditions for global economic growth remain challenged and with heightened geopolitical risk and investor scrutiny following high-profile deal withdrawals, we expect companies to display patience and consideration while pursing M&A activities in 2015. Figure 1. The Deloitte M&A Index Global M&A deal volumes Q4 2014 9,500 M&A deal forecast 9,000 High: 8,800 8,500 Mid: 8,550 Low: 8,300 8,000 7,500 7,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 Deloitte M&A Index M&A deal volumes (projections) (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 Q4 2014 3 | Factors set to influence M&A in 2015 The Deloitte M&A Index has highlighted a number of factors that are likely to impact deal volumes in 2015. The return of ‘animal spirits’ Figure 2. Global disclosed deal values and yearly volumes and values of 1 A defining theme for 2014 has been the mega-deals (2007 – YTD 2014) return of mega-deals over $10 billion in Deal volumes Disclosed deal values ($bn) value. So far, 26 mega-deals have been 40 4,000 announced during the year, amounting to 35 3,500 $672 billion in value, the highest figure since 30 3,000 2007. The steady flow of mega-deals has 25 2,500 propelled total deal values for year-to-date 20 37 2,000 to $2.5 trillion, again, the highest figure 15 25 26 1,500 10 14 16 16 1,000 since 2007. 5 12 9 500 0 2007 2008 2009 2010 2011 2012 2013 2014 0 At the start of the year, we highlighted that YTD conditions were favourable for dealmaking, however confidence remained low. The equity Volume of mega-deals (LHS) Value of mega-deals ($bn)(RHS) rallies in the first half of the year provided a Disclosed deal values ($bn)(RHS) much-needed boost to confidence, which Source: Thomson One Banker; Deloitte analysis did not get undermined in spite of some high-profile deal withdrawals. M&A financing: Shift from cash to stock Figure 3. M&A deals by type of financing as % of total value of deals While companies are sitting on record levels of (2012 – YTD 2014) cash reserves, they are less reluctant than in the 100% past to use their hard preserved cash in deal financing. In 2012 all-cash deals accounted for 80% 75 per cent of the total. However since that time, 15% points there has been a steady decline in cash only deals 60% which has made up just 60 per cent of the total to date in 2014. Instead there has been a steady 40% 13% points increase in deals involving stock as a means of 4% points finance, and in 2014 nearly one third of deals had stock as a component. 20% Many companies have been undertaking 0% Cash Cash & Stock Stock share repurchase programmes in the last few years, and with the value of equities in global 2012 2013 2014 YTD market hitting a record $65.6 trillion earlier this year, stock has been an attractive currency for Source: Bloomberg; Deloitte analysis acquisitions. We expect this trend to continue in 2015. 1 YTD 2014 refers to 14th of November 2014.

3 | The Deloitte M&A Index Q4 2014 Factors set to influence M&A in 2015 Leveraged loans driving M&A Figure 4. Acquisition-related loan volumes in the US (January to October In recent years there has been a boom in the 2007–2014) syndicated loan market. Data from Dealogic 100% shows that leveraged loans, which make up 37 per cent of total syndicated global loans, 80% stood at $1.35 trillion in 2014. Companies are increasingly using leveraged loans to 60% fund M&A activities. As of October 2014, acquisition related loan volumes in the US 40% reached $206 billion, the highest since 2007. 20% In addition the search for yield is driving alternative investors such as hedge funds and 0% specialist asset managers to provide lending 2007 2008 2009 2010 2011 2012 2013 YTD for mid-market companies. The Deloitte 2014 Alternative Lending Tracker estimates that in % Leveraged % Investment grade Europe a large proportion of the financing Source: Dealogic is being used for M&A or LBO purposes. We expect this trend to continue in the coming year and provide a steady rise in both main and mid-market M&A activities. Corporate cash still plentiful Figure 5. S&P Global 1200 corporate cash and spending patterns Deloitte estimates that one thousand largest ($bn), 2000 to H1 2014 non-financial companies in the world 900 3,500 have around $3.1 trillion in cash reserves 800 3,000 as of H1 2014, close to record highs. 700 2,500 These companies have been returning cash 600 500 2,000 to shareholders through dividends and share 400 1,500 buy-backs. In H1 2014, companies returned 300 1,000 200 $600 billion, the highest six-monthly amount 100 500 in well over a decade. Much of this has 0H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 0 been financed through debt which grew 2000 2001 2003 2004 2006 2007 2009 2010 2012 2013 by 21 per cent from $7 trillion in 2008 to $8.5 trillion in 2014. Cash reserves (RHS) Capex (LHS) M&A spend (LHS) Dividends (LHS) Buyback (LHS) The S&P Global 1200 Index reached record Source: Bloomberg; Deloitte analysis highs in 2014, however the annual revenue growth for these companies fell for two consecutive years. We expect investors to put the spotlight back on revenue growth and companies to start spending on M&A and capex to boost their growth prospects.

4 | The Deloitte M&A Index Q4 2014 5 | Factors set to influence M&A in 2015 1 Divestments and spin-offs Figure 6. Global divestment and spin-off volumes ($bn), 2008 – YTD 2014 Divestment values have already reached $129 billion in 2014, the highest since 2011. 350 Many companies are now actively evaluating 300 their portfolios and disposing of non-core assets to refocus and build a platform for 250 growth. For instance, Procter & Gamble 200 announced a major strategic review of its 150 portfolio and is planning to divest several high-profile brands such as Duracell. Pressure 100 from shareholder activists is increasing, and it 50 is estimated that 45 per cent of the activists who initiated public campaigns in 2014 made 0 2008 2009 2010 2011 2012 2013 2014 demands relating to M&A activities. YTD Volume of divestments Volume of spin-offs While the last couple of years have been a subdued time for spin-offs, there were many Source: Thomson One Banker; Mergermarket; Deloitte analysis high-profile announcements in the second half of the year. HP, eBay, Symantec and Bayer are some of the companies that announced spin-off plans and these are expected to keep the markets busy in 2015. The return of private equity Figure 7. Financial sponsor investments and exits (2008 to Q1 – Q3 2014) Private equity (PE) firms had an active 2014. In just the first three quarters, they have 400 made more exits than in the whole of 2013. 350 300 The buoyant IPO markets during the year 250 favoured private equity exits, and PE firms 200 had already completed more than 200 exits 150 through IPO by Q3 and are on course for a 100 50 strong year-end performance. Since 2008, 0 2008 2009 2010 2011 2012 2013 Q1 – Q3 the financial sponsors have made $1.74 trillion 2014 through exits, and it was matched by $1.7 trillion in new investments. Exit values ($bn) Investment value ($bn) Source: Thomson One Banker; Deloitte analysis Preqin estimates that the private equity sector have around $1.19 trillion in ‘dry powder’ and with a number of funds approaching their maturity, we can expect PE firms to start investing more in 2015. 1 Divestment refers to the agreed sale of an asset or assets from one company to another, distinguished from other transactions by the fact that it is the vendor which actually initiates the transaction. Spin-off refers to the tax free distribution of shares by a company of a unit, subsidiary, division, or another company’s stock, or any portion thereof, to its shareholders.

5 | The Deloitte M&A Index Q4 2014 Factors set to influence M&A in 2015 Diverging economic trajectories creates Figure 8. MSCI Indices performance opportunities for US corporate sector In October 2014, the US Federal Reserve finally 300 ended its $4.5 trillion bond-buying programme 250 that had helped steer the US economy through 200 the financial crisis. This year the US economy is 150 well on the way to recovery with GDP growth 100 expected to accelerate to 3.1% in 2015. The 50 US unemployment rate is below six per cent; 0 US corporate after tax profits were estimated at 2009 2010 2011 2012 2013 2014 a record $1.7 trillion for the last financial year MSCI US Index MSCI Emerging Market Index and US equities outperformed both European MSCI World excl US Index and emerging market indices. A growing US economy also means a strengthening US dollar, Source: Bloomberg; Deloitte analysis which since 2008 has gained about 13 per cent against the euro and about 12 per cent against the British pound respectively. Figure 9. S&P 500 revenues by region (2012) 1% 1% Meanwhile many others are struggling to revive their economies. In the eurozone, 4% 5% the European Central Bank announced that it 6% would inject a further one trillion euros into the economy to avert deflationary pressures. 7% This could result in higher asset valuations but a weakening Euro. The Bank of Japan outlined aggressive measures to counter deflationary 9% tendencies and they could give a competitive 66% advantage to Japanese manufacturing. At the same time the long-term growth forecasts for the BRIC countries have been lowered. S&P 500 companies in 2012 earned around US Other EMEA Asia-Pacific ex. Japan Other 34 per cent of their revenues from overseas. Other Americas Western Europe South America Japan With such a significant amount of turnover coming from countries experiencing a slow Source: Goldman Sachs Global ECS research recovery, US companies may come under pressure to grow their revenues elsewhere. The stronger dollar and strength of their share prices presents an opportunity for US companies to do more cross-border M&A deals. In the coming year we should expect to see an increase in cross-border transactions, particularly from the US into Europe.

6 | The Deloitte M&A Index Q4 2014 7 | Corporate barometer Analysis of the S&P Global 1200 company Figure 10. Company fundamentals, S&P Global 1200: Q1 – Q3 2013 vs. fundamentals yields four key insights: Q1 – Q3 2014 average Average cash in hand ($bn) First, average revenue growth fell from 5.9 2.0% in the first three quarters of 2013 to 0 10 0.4% in the corresponding period of 2014. With corporates seemingly reaching peak 6.5 operational efficiency, we anticipate they Average EPS will need to look for growth outside of their 0.8 current markets in 2015. 0 1.5 Second, average cash in hand per company 0.9 increased from $5.9 billion over the first Year-on-year average revenue growth (%) three quarters of 2013 to $6.5 billion in the 2.0 same period of 2014. FCFF across the S&P 2.5 Global 1200 shows a similar trend, averaging 0 $433 million across the first three quarters 0.4 of 2013 and $478 million in the same period of 2014. Average dividend paid ($m) 208 Third, average dividend payments per 0 250 company increased from $208 million in the 228 first three quarters of 2013 to $228 million for the same period of 2014, continuing Average capital expenditure ($m) the trend of returning cash to shareholders. 432 The average EPS also increased from $0.8 in 500 2013 to $0.9 in 2014. 400 420 Finally, average capital expenditure per Average free cash flow for the firm (FCFF) ($m) company fell slightly from $432 million to 433 $420 million. 500 400 478 Q1 – Q3 2013 average Q1 – Q3 2014 average Source: Bloomberg; Deloitte analysis

7 | The Deloitte M&A Index Q4 2014 Geographies Europe searches for growth in Figure 11. Global deal values by region of acquirer ($bn), Q1 – Q3 2013 vs. North America Q1 – Q3 2014 There has been a sharp increase in European 1,200 33% dealmaking. Europe’s M&A deal values jumped from $301 billion in the first nine 1,000 months of 2013 to more than $600 billion in the same period of 2014 largely due to 800 103% rebound of M&A within the EU. 600 46% The EU-North America corridor has been 400 particularly active on both sides in 2014. European companies have been making 200 acquisitions in North America where the 0 economic recovery has taken hold much faster. Europe North South Asia-Pacific Africa and European outbound deals in North America America America Middle East reached nearly $150 billion, more than six Q1 – Q3 2013 Q1 – Q3 2014 times the level in 2013. On the other hand, North America’s outbound M&A into Europe Source: Thomson One Banker; Deloitte analysis almost matched this amount with more than $130 billion in disclosed deals, up more than $80 billion from the previous year’s level. Return of Chinese dealmaking Figure 12. Chinese outbound M&A activity into US and Europe ($m), Earlier this year China’s National Economic 2005 – YTD 2014 Development and Reform Commission Disclosed deal values ($m) (NDRC), which is the main authority for 9,000 approving outward investment, raised the 8,000 threshold for investments requiring approval 7,000 to $1 billion. This gave a major boost to 6,000 5,000 Chinese outbound M&A activity in US and 4,000 Europe which reached $13.0 billion in 2014, 3,000 an increase of nearly 31 per cent over 2013. 2,000 1,000 In particular, outbound activities into Europe 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 more than tripled from $2.3 billion in 2013 to YTD $7.9 billion for the ten months of 2014. United States Europe Historically Chinese outbound M&A activities Source: Thomson One Banker; Deloitte analysis centered around manufacturing and energy & utilities. In recent months they are moving towards consumer brands and technologies. Earlier this year, Hony Capital, a Beijing based private equity firm, acquired UK based Pizza Express for $1.54 billion in what was the largest ever private equity buyout by a Chinese firm.

8 | The Deloitte M&A Index Q4 2014 9 | Sectors Global deals are up across all major Figure 13. Global deal values by sector ($bn), Q1 – Q3 2013 vs. Q1 – Q3 2014 sectors The first three quarters of 2014 saw an overall 500 increase of 50 per cent in disclosed deal values 450 compared with the same period in 2013. 400 350 Global deal values in the life science and 300 healthcare industry were boosted by seven 250 443 mega deals which totalled nearly $180 billion 200 378 helping global deal values in the sector reach 150 298 316 278 317 100 247 216 226 197 202 $298 billion, an increase of 139% over the last 145 year’s performance. 50 125 108 0 e ia s ces , Medelecomms Life Sciences Real Estate and HealthcarManufacturingand Tgy & Resourinancial Services echnology F T Ener Consumer Busines Q1– Q3 2013 Q1– Q3 2014 Source: Thomson One Banker; Deloitte analysis Manufacturing sector deals increase Figure 14. Manufacturing sector deal values by geography ($bn), globally Q1 – Q3 2013 vs. Q1 – Q3 2014 In the manufacturing sector during the first 120 three quarters of 2014 around $247 billion of deals were announced, up from $108 billion 100 for the same period in 2013. Four mega-deals accounted for 29 per cent of this total. 80 60 110 The sector has experienced consolidation deal activities particularly in North America and 40 92 Europe. In North America, total deal values almost tripled from $38 billion to $110 billion 20 38 41 39 5 26 year-on-year. In Europe, the rise was also 0 2 1 2 significant from $41 billion in Q1 – Q3 2013 North Europe South Africa and Asia-Pacific to $92 billion in the same period of 2014. America America Middle East Q1– Q3 2013 Q1– Q3 2014 Source: Thomson One Banker; Deloitte analysis

9 | The Deloitte M&A Index Q4 2014 Charts we like Figure 15. Inflation rate based on CPI change (%) 2009-2014 Figure 18. Withdrawn deal volumes and values, 2004-YTD 2014 6.0% Deal volumes Disclosed deal values ($bn) 5.0% 1,400 1,000 4.0% 868 900 3.0% 1,200 800 2.0% 1,000 582 700 1.0% 800 600 0.0% 430 500 -1.0% 600 240 290 400 -2.0% 400 264 455 243 184 300 -3.0% 231 144 200 2009 2010 2011 2012 2013 2014 200 100 Eurozone UK Japan US 0 4 5 6 7 8 9 D0 Source: Bloomberg; Deloitte analysis 200 200 200 200 200 200 20102011 201220132014YT Deal volume Deal value ($bn) Source: Thomson One Banker; Deloitte analysis Figure 16. 10-year government bond yields 2009-2014 Figure 19. S&P Global 1200 revenue growth v share price 4.5% (2001–2013) 4.0% S&P Global 1200 Revenue growth (%) 3.5% 2,000 20% 3.0% 1,800 2.5% 1,600 15% 2.0% 1,400 10% 1.5% 1,200 5% 1.0% 1,000 0.5% 800 0% 0.0% 600 -5% 2009 2010 2011 2012 2013 2014 400 -10% Europe UK Japan US 200 0 -15% Source: Bloomberg; Deloitte analysis 2001200220032004200520062007200820092010201120122013 S&P Global 1200 Index Revenue growth (Non-financial companies) Source: Bloomberg; Deloitte analysis Figure 17. Currency exchange rates against US dollar Figure 20. S&P Global 1200 cash proportion of M&A spend as £/€ to 1 USD ¥ to 1 USD % of market capitalisation (2000–2013) 0.9 140 10.0% 9.0% 0.8 120 8.0% 0.7 0 7.0% 0.6 10 6.0% 0.5 80 5.0% 0.4 60 4.0% 0.3 3.0% 0.2 40 2.0% 0.1 20 1.0% 0.0 0 0.0% 0 1 2 3 4 5 6 3 2009 2010 2011 2012 2013 2014 200 200 200 200 200 200 200200720082009201020112012201 Pound Euro Yen Europe United States Source: Bloomberg; Deloitte analysis Source: Bloomberg; Deloitte analysis

10 | The Deloitte M&A Index Q4 2014 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. The team would like to thank Russell Shoult for his contribution in production of the M&A Index. 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. 40047A