1. Financial services
With financial services playing an important part in the daily lives of the general public, mergers and acquisitions (M&A) activity often draws a wider audience than just those with a vested interest in the sector. Although the big bank mergers witnessed after the financial crisis are unlikely to be repeated, there is still plenty of activity in the sector.
“While there has been low activity in the M&A sector over the past five years against the backdrop of the recession, activity has very much heated up in 2014, with economic conditions improving and business confidence growing,” says John Lunn, executive director and partner at transformation consultancy Moorhouse.
“M&A activity in the financial services sector is being driven by two factors. Firstly, regulatory changes have seen some business activities become more trouble than they’re worth to some of the big institutions. Secondly, new entrants, such as challenger banks including Metro Bank, have increased competition in the market and changed the landscape for the established organisations.”
Regulatory challenges such as the Volcker Rule in the United States, which has placed restrictions on banks’ ability to trade their own money and led to the sale of trading desks, and greater capital requirements imposed on the banking and insurance sectors, have played a key part in contributing to M&A activity. Elsewhere, asset managers have sought to consolidate their positions in the market with bolt-on acquisitions.
2. Professional services
Not only does the professional services sector, which includes consultants, law firms and accountants, play an important part in the M&A industry, it has also become a hub of corporate activity itself in recent years.
“The continued growth in outsourcing is a key underlying factor in the attractiveness of the general business services sector, especially the professional services subset, and is a major catalyst for M&A activity,” explains Joel Hope-Bell, co-head of UK M&A and managing director in the global M&A advisory practice at Duff & Phelps.
Although firms in the sector now find their services in greater demand in established home markets since the global downturn, they are also seeking out new opportunities in other fast-growing markets abroad. With an increasing number of opportunities in developing markets, the need for local expertise is also fuelling appetite for acquisitions.
Many companies are seeking out new investment opportunities, often further afield, rather than allowing cash to accumulate in the low-rate environment.
“Professional services firms need to support their clients across an increasingly global network, consequently they want to expand their geographical footprint in line with that of their clients,” says Mr Hope-Bell.
“As a result this has unquestionably been a catalyst for a higher volume of cross-border activity in the sector as firms seek to establish or bolster their presence in geographies where they are underweight.”
3. Technology, media and telecoms
This is one of the busiest sources of M&A activity in the 21st century as small, innovative startups have been snapped up by bigger players. Industry giants have also tied up together, with varying degrees of success; so it remains one of the most interesting sectors from an outsider’s perspective.
Going into 2014, dealmakers and investors expected the sector to be the most active this year and it hasn’t disappointed.
“Cross-border transactions have been trending upwards throughout 2014 and are expected to continue,” says Thierry Monjauze, managing director at middle-market investment bank Harris Williams & Co. “There is a strong supply of companies in the market and the M&A environment for TMT acquisitions is the healthiest it has been since 2008.”
Peter King, corporate partner at global law firm Weil, adds: “A number of longer-term trends are driving M&A activity, including the convergence of mobile, fixed-line, cable and television, as well as regulatory pressures to increase competition.
“These trends are driving not just larger deals, but also smaller deals, for example the increased interest by private equity in mobile infrastructure assets around the world.
“At the same time, many of the household name technology companies, such as Apple, are looking to spend their significant cash resources and to expand their range of product – the acquisition of Beats by Apple is an example.”
M&A activity in the healthcare and related sectors has been heightened in 2014, with a number of challenges facing the industry and contributing to a number of high-profile deals.
Consultancy Deloitte found that competitive pressure and a need to diversify portfolios were the strongest motivators for companies to seek M&A opportunities. However, there have been other factors contributing to the rise in activity.
“There’s no doubt that a resurgence in pharma mega-deals has spurred activity, alas for all the wrong reasons – cost-saving, tax mitigation and financial engineering,” says Gordon Hamilton, partner at London-based M&A specialist Cavendish Corporate Finance.
“However, it’s a clutch of other factors that have and are continuing to drive activity, such as the rise in drugs going off-patent, and big pharma companies that are suffering a lack of innovation and are looking to buy smaller firms to provide that.”
While there have been several large M&A deals involving the pharmaceuticals sector, in the wider healthcare industry different factors and challenges are contributing to increased activity.
Virginia-based middle-market investment bank Harris Williams & Co notes that hospitals have come under increasing pressure to cut costs and increase profitability from insurance companies.
Elsewhere it notes that medical equipment procurement departments are more interested in working with multi-product and service companies, as opposed to single-product specialists, fuelling consolidation.
5. Real estate
Commercial real estate has continued to attract investment this year, as investors look for alternatives to equities amid ongoing geopolitical risks and concerns over the global economy.
“Real estate assets are strongly in favour, with allocations continuing to grow from virtually all investor types,” says commercial real estate specialist JLL in its outlook for the fourth quarter. “This reflects, to some extent, the continued volatility of equities, low bond yields and, despite yield compression, relatively attractive spreads between property yields and borrowing costs.”
Eversheds partner Aleen Gulvanessian says: “The real estate market has been immensely busy for more than 18 months now and we have really seen the impact of this in our M&A team.”
The third-quarter M&A round-up for the engineering and construction industry by PwC reveals that construction companies have been the subject of most activity so far this year having been involved in the greatest number of deals, closely followed by civil engineering firms.
Asia and Oceania has been the most active region, witnessing more than 450 deals this year. The UK, eurozone and North America have seen a similar number of deals, but the former has experienced much larger deals with an average size of $434 million.
The merger of cement firms Paris-based Lafarge and Swiss firm Holcim, and of Foster Wheeler and Amec in the UK, have contributed to the large deal flow in Europe this year.