The year 2016 has been marked by many major events. The U.S. presidential election, Brexit, and many terrorist attacks have left many people wondering what will happen next. Stock and PE markets have not been immune to this tumultuous year. The following outlines how the M&A market faired in the 2nd Quarter 2016, as well as some insight on what to expect for the rest of 2016.
- Decreased Dollar Value and Volume of Deals
Deal activity overall weakened in 2Q 2016. According to a report by PitchBook, PE firms invested $135 billion across 719 completed transactions in the second quarter of 2016, representing quarter-over-quarter declines of 18% and 14%, respectively. However, when looking at the 2016 run rate it appears that dollar value is on track to be just slightly below 2015 activity.
- Earnings Decline
As a whole, corporations are continuing the trends seen in recent quarters and are reporting diminishing 2Q earnings. According to data from Factset, 2Q S&P 500 earnings are estimated to drop by 5.6%, marking the first time corporate earnings have experienced five consecutive quarters of YoY declines. These declines could be due to numerous economic and political factors, including the strong U.S. dollar, the Fed’s potential interest rate hikes, and the upcoming presidential election.
- Add-ons gaining popularity
Add-ons are becoming increasingly more popular than traditional buyouts as we enter the second half of 2016. A Pitchbook analysis shows 64% of buyouts were add-ons so far in 2016, compared to 61% in 2015 and 43% in 2006. By looking at this trend, it seems that PE firms are more interested in growth deals as a safer option than more traditional leveraged buyouts. The bulk of these add-on deals may be what is driving the large amount of deals in the middle market between $25 and $100M. According to Pitchbook, those deals accounted for over 25% of all activity in 1H 2016, the highest proportion since 2012.
- Debt as percentage in deals is decreasing
The hesitation of dealmakers can also be seen in how the deals are paid for. Pitchbook data shows debt financing accounts for only 48.9% of the debt-to-equity mix. In contrast, the high point for debt financing was 2013, where the median debt percentage for all deals was 61.6%. This pullback from highly leveraged deals signals that firms are more risk-averse today.
- EV/EBITDA is increasing
Although we have seen a decline in deals so far in 2016, the price of those deals is on the rise. Median EV/EBITDA multiples are higher than they have been at any point since 2010, coming in at 11.3x in 2016. By comparison, 2015 with its massive deal quantity had a median multiple of 10.3x, and 2010’s multiple was 8.9x. The reason the multiples are higher is because buyers are buying better quality companies. They assume less risk by purchasing these companies, leading to a higher price.
- Majority of the deals were for B2B businesses
B2B businesses accounted for the majority of deals in 2016, beating out Energy, Healthcare, B2C, Financial Services, and IT. The preference of B2B over B2C businesses could be attributed to the shift towards less risky deals. Business clients tend to be more stable, and there is less push for volume in the B2B world compared to B2C businesses. B2C and Financial Services made up the second two largest sectors with Financial Services deals accounting for approximately $53B in 1H 2016.
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