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Sector M&A outlook

Global Capital Confidence Barometer | 17th edition

Acquiring technology to accelerate innovation — a key consideration across all sectors

Oil and gas

  • With oil price stabilization has come a transition to a new normal, which has seen confidence grow over the past six months. Deal activity has increased in some segments compared to 2016. There is an expectation of increased activity through the coming year as we see more activity in both upstream and downstream.
  • Increasing innovation in deal structures from nontraditional methods (JVs, alliances, etc.) has gained traction with companies in a cash-constrained environment.
  • Private equity and sovereign wealth funds continue to invest in oil and gas, as they look to deliver higher returns through selective investments. Though this has helped drive some acquisitions, caution remains, as not all investments have delivered on expectations.

Mining and metals

  • Divestments drove M&A activity through the down cycle as the sector liquidated assets to pay debt and strengthen balance sheets. In 2017, a rebound in market fundamentals eased pressure on mining companies, but did not reduce the focus on reducing financial risk.
  • As such, capital allocation tended to favor continued debt reduction and the return of cash to shareholders over growth. With the industry now in better financial shape, M&A is increasingly strategic in nature, with companies positioning for the next growth cycle.
  • However, investor concerns over the erosion of value creation will trigger changes in approach and a return to acquisitive transactions. The downcycle saw exploration budget reduction and a decline in inventory of projects at exploration and development stages. Companies intending to expand output in the short term will find themselves with limited options but to acquire assets already in production.

Life sciences

  • While the strategic drivers for M&A and divestitures – the growth imperative, increasing therapeutic focus and the need for scale – continue to be very positive, some companies are holding back pending more clarity on the future of US tax reform, particularly the repatriation of offshore cash.
  • This caution affects larger and megadeals more than bolt-ons and tuck-ins, although CEOs may be getting to the point where they are comfortable that any policy changes, if they happen, will not be drastic.
  • Outside the US, biopharma M&A has seen steady growth, as companies continue to divest non-core assets and focus on key therapeutic areas.

Telecommunications

  • Telecommunications companies continue to show elevated M&A appetite at a time when convergence, consolidation and digital growth opportunities are pronounced across all geographies.
  • Boundaries between industry verticals are blurring, and telcos view adjacencies in technology and media sectors with particular optimism. The addition of content, advertising and IT capabilities remains squarely on the M&A agenda, while new opportunities in IoT enable telcos to serve changing demands across a range of industry verticals.
  • Partnerships and alliances are also gaining ground as operators consider low-cost routes to expand their service portfolios. In turn, this underlines the importance of effective build, buy or partner strategies as operators engage in various forms of value creation.

Industrials

  • Industry 4.0 is reshaping capital agendas for industrials companies. This is the fundamental shift from asset-based manufacturing to “manufacturing services” models enabled by customer transparency, technology and digital capabilities.
  • Industrials are experiencing a wave of consolidation in leading submarkets. The driver is to grow profits through focused “pure-play portfolios.” This will continue to be characterized by selective megadeals, followed by strategic spin-offs, as companies maneuver to protect market share and react to changing customer demands.
  • Industrials valuations are relatively high but not fully deterring suitors. Some view the risk of being left out of the winner’s circle for Industry 4.0 as outweighing the risk of overpaying. Impressive firepower and inexpensive financing will tip that equation even more toward M&A activity for both strategic and PE buyers.

Automotive and transportation

  • At a time of rapid technological disruption, automotive companies are proactively managing their portfolios to protect their core businesses. Key markets, such as China, Europe and California, where the push for vehicle electrification is highest, are driving the case for change.
  • New digital and connectivity technologies enhance the need for auto companies to adopt new business models and seek further M&A opportunities in the tech sector, and others.
  • Automotive M&A revolves around acquiring innovative capabilities offered by start-ups. The collaborative economy, where mobility providers offer services without owning vehicles, is leading to partnerships between automotive vehicle manufacturers and new entrants.