Not surprisingly, those 50 percent of companies anticipating either an M&A transaction or sale tend to be faster-growing, having grown revenues 273 percent over the past five years (88 percent faster than non-planners), and they expect to grow revenues at a 24.2 percent pace over the next 12 months (32 percent faster). Service firms are more likely to take action over the next three years -- 54 percent versus 44 percent of product-based businesses.
The survey results indicated the key objective motivating the expected high activity level of M&A deals over the next three years is market share expansion (82 percent). Other objectives identified included the desire for non-organic growth, competitive positioning, obtaining key personnel or employees and strategic skill sets. Critical company attributes focus on a good strategic “fit” (96 percent), along with similar culture and values, and targets that offer market/product expansion.
"The competition for quality deals has heated up significantly as private equity coffers are overflowing with cash looking for an investment home,” said Fentress Seagroves, transaction services partner in PricewaterhouseCoopers' Private Company Services practice. “With record breaking amounts of capital available in the market, companies choosing to grow through acquisition are finding high prices demanded by sellers flooded by interest. A sound strategy and effective execution skills become more important to an acquirer as the margin for error shrinks and returns come under pressure."
Merger & Acquisition Profile
Overall, 38 percent of “Trendsetter” CEOs report planning one or more acquisition over the next three years -- 11 percent reporting "definitely," and 27 percent reporting "probably." Another 14 percent are not certain, while 46 percent will probably not be involved in a M&A. Two percent did not report.
- Most of the companies planning M&A activity are truly fast growers, having grown their revenues at a 313 percent pace over the past five years, which was double the rate of their non-M&A peers (145 percent). And they expect to grow company revenues at a 26.0 percent growth rate over the next 12 months (versus 18.3 percent for non-M&A peers, 42 percent faster).
- More service firms expect to be involved in M&A over the next three years -- 43 percent, versus 31 percent of product firms. It is interesting to note that this group tends to be slightly below average in establishment size (11 percent below norm).
- As expected, companies employing M&A as a growth tool are much more active in financial markets: 19 percent were involved in bank loans in 3Q06 (versus eight percent) and 25 percent increased their companies’ credit availability (versus 15 percent). Overall, 31 percent will be considering non-traditional financing (private placement, 17 percent; angel investors, 15 percent; venture capital, 13 percent) -- versus 15 percent for non-M&A peers. Notably, few cite lack of capital for investment as an important barrier to growth over the next 12 months -- 18 percent, versus 16 percent for all others. Given the market dynamics, financing options and liquidity appear available for their M&A needs.
- Many (61 percent) plan major new investments of capital over the next 12 months (versus 33 percent for all others). Among the broader group, average spending is 12.4 percent of revenue levels. 86 percent plan to add to their workforce over the next 12 months, on average, 10.4 full-time employees.
More Borrowers Also Explore Non-Traditional Financing
While reasonably priced all-cash deals were predicated to be the predominant transaction structure in M&A acquisitions over the past three years (57 percent), nearly as many prospective M&A acquirers over the next three years will also be looking at including long-term incentives deals, with an “earn-out” based on performance (51 percent). A higher proportion of deals using stock as consideration will also be contemplated in the near future (36 percent).
 | Merger or Acquisition | |
| Next 3 Years | Past 3 Years |
| | |
| 37% | 20% |
| 55% | 57% |
| 51% | 43% |
| 36% | 29% |
| 5% | 7% |
| 7% | 9% |
Motivation for M&A Activity
The leading factor noted by the survey participants motivating merger or acquisition activity over the next three years is to achieve larger market share or dominance, cited by 82 percent of those planning M&A efforts. Six other factors were noted by the majority of M&A planners -- from need for non-organic growth (62 percent) to obtain key employees or skill sets (56 percent).
| Motivating Factors | Plan M&A Next 3 Years | Completed M&A Past 3 Years |
| | |
| 82% | 79% |
| 62% | 53% |
| 60% | 59% |
| 59% | 41% |
| 58% | 45% |
| 57% | 45% |
| 56% | 52% |
| 40% | 43% |
| 28% | 28% |
| 14% | 10% |
Comparison of those planning M&A activity in the near-future with those who completed a M&A over the past three years shows a similarity in scope of motivations. However, three major motivating factors jumped out as being considered by more companies planning M&A activity: to achieve sufficient size/scope (59 percent, 18 points higher); competition acquiring other companies (58 percent, 13 points higher); and industry consolidation (57 percent, 12 points higher).
“When these CEOs are looking at how to meet their growth goals, they increasingly consider acquisition over organic growth as a means to achieve their overall business strategy,” said Seagroves.
Important Company Attributes in M&A Planning
Virtually all M&A planners cite the importance of a good strategic “fit” (96 percent), ability to be effectively integrated, consistency with the strategic plan (94 percent), presence of similar culture and values (89 percent), as well as target companies that offer market/product expansion (89 percent). The next set of important considerations include the rationale that the target offers geographic expansion (72 percent) and that a deal could enable a company to obtain skilled professionals/technicians (71 percent). The majority also cite obtaining strong top management (62 percent) and related intellectual property (56 percent).
The highest level of importance (“very important”) was given to strategic “fit” (89 percent), effective integration (77 percent), similar culture and values (63 percent), and offers market/product expansion (58 percent).
Comparison of M&A planners with past M&A implementers reveals a similar rating of company attributes, with two exceptions. Companies planning M&A gave lower ratings to geographic expansion (62 percent, 10 points lower); and higher ratings to a company that would not be threatening to our key employees (57 percent, 12 points higher).
Types of Companies Important
As one would expect, 91 percent of surveyed CEOs are planning M&A with a company in their own industry (78 percent “very important”). Second, 85 percent want an established business with a three to five year track record, (45 percent “very important”). CEOs will be looking for a company of smaller size (67 percent) or equal size (58 percent), and (35 percent) are considering a foreign company).
"Companies are increasingly considering acquisitions in foreign markets as an effective way to build a global enterprise rather than taking the risk associated with organic growth outside the domestic market, said Seagroves."
Those acquiring another company over the past three years (20 percent of total) did not typically acquire a division of a larger company (only six percent).
Exit Plans: How CEOs Expect to Monetize the Value of Business
The majority of “Trendsetter” CEOs (58 percent) expect to monetize the value of their business by a sale or divestiture, either to another company (55 percent) or a private equity firm (23 percent). Next, 28 percent will consider a management buyout or ESOP, while 20 percent expect a sale or transition to next generation family members. A limited few will consider an IPO (11 percent). Some multiple answers are included here.
| | Plan M&A or Sale Over Next 3 Years | |||
| All Firms | Any | Merger | Sale | None |
| | | | | |
| 58% | | | | |
| 55% | 70% | 65% | 88% | 40% |
| 23% | 30% | 29% | 39% | 17% |
| 4% | 7% | 6% | 10% | 1% |
| 28% | | | | |
| 18% | 16% | 17% | 15% | 20% |
| 15% | 13% | 15% | 8% | 17% |
| | | | | |
| 20% | 13% | 9% | 11% | 27% |
| 11% | 13% | 16% | 8% | 8% |
| 2% | 1% | 1% | X | 2% |
| 8% | 3% | 4% | 1% | 14% |
| 3% | 1% | 1% | 1% | 5% |
| 7% | 6% | 7% | 4% | 8% |
"Private equity is becoming involved in an increasingly large percentage of transactions, whether through an anchor acquisition or an add-on for a portfolio company. Their vast appetite for deals has increased the efficiency in the private company pricing market,” added Seagroves. “Looking for investments outside of the public markets, hedge funds are also becoming more active in M&A activity, providing a one-stop option for companies to source equity and debt from the same source to get a transaction done.”
PricewaterhouseCoopers’ “Trendsetter Barometer” is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 144 countries work collaboratively using connected thinking to develop fresh perspectives and practical advice.
“PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
If you have a question about this “Trendsetter Barometer” survey, please contact Annmarie Floyd at 646-471-4629 or e-mail to: annmarie.e.flody@us.pwc.com
For more information about Barometer surveys, including recent economic trend data and topical issues, please visit our web site: www.barometersurveys.com.
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