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Executives See Increase in Upcoming Mergers & Acquisitions and Strategic Alliance Activity: Deloitte Survey

Opportunities in emerging markets seen as key driver of strategic alliance transactions

New York, May 22, 2012 — Executives are anticipating an uptick in both merger and acquisition and strategic alliance activity over the next two years, according to Deloitte’s third annual Corporate Development survey. Nearly half the respondents (46 percent) expect an increase in mergers and acquisitions activity. Apparently executives in the manufacturing sector are the most bullish on M&A prospects with more than half responding they expect an increase in strategic alliance transactions driven by investment in emerging markets and a need for more judicious deployment of scarce capital.

The survey also indicates that corporate boards are playing a more significant role in the M&A process. More than 40 percent of executives believe their boards of directors have become more involved in M&A over the last two years, with boards asking for more frequent, detailed updates and spending more time deliberating these transactions. While roughly half (54 percent) of executives at relatively large companies — those with at least $1 billion in annual revenues — say that the greatest value boards added was through constructive evaluation of and challenges to transaction objectives, fewer than one-third (31 percent) of executives from smaller companies held this view.

Activist-investors are also expected by survey respondents to continue increasing their role in the M&A process. One third of respondents expect that activist-investor activity will grow over the next 12 months, putting more companies in play (52 percent) and forcing more carve-outs and/or breakups (39 percent), however, executives were split as to whether the results of these activities would be positive or negative.

While 40 percent of respondents ranked mergers as the most difficult type of deal to execute, nearly one in four (23 percent) viewed joint ventures and strategic alliances as presenting a greater challenge. Also, more than 40 percent of executives concede that their companies are less skilled at executing strategic alliances than mergers. As to why strategic alliances stall or break down, executives most frequently pointed to the alliance partners’ differing views and their inability to align strategy.

“Strategic alliances and joint ventures can be difficult transactions, nevertheless we are seeing a notable uptick in this area,” says Chris Ruggeri, principal, Deloitte Financial Advisory Services LLP and its Merger & Acquisition Services leader. According to Ruggeri, “The perception of strategic alliances is changing from a last resort to a preferred investment strategy, especially in emerging markets, and companies are learning from industries like technology and life sciences that use strategic alliances very effectively to manage risk and capital.”

Fewer than 40 percent of the executives surveyed responded that their companies review their portfolios annually or more frequently to identify divestiture candidates. “The results of our survey indicate that a surprisingly lower percentage of respondents routinely evaluate their portfolio of businesses for divestitures. A core component of corporate strategy is identifying businesses that are underperforming or non-core. Skipping this step puts companies at risk of needing to be reactive rather than proactive as performance slips or when activists draw attention to a particular business,” added Ruggeri.

The top-ranked indicator of a divestiture’s success, according to 57 percent of respondents, was value realization followed by 31 percent citing minimal disruption to the ongoing business. Conversely, the greatest factors cited by the respondents as negatively impacting value were inadequate preparation and poor quality information (28 percent) and the complexity of carve out and separation issues (22 percent).

“In practice, a detailed execution plan focusing on issues of importance from the potential buyer’s perspective helps accelerate the process, maximize value and minimize disruption to the organization,” says Kathleen Neiber, a Merger & Acquisition Services partner with Deloitte & Touche LLP. “Well-prepared sellers will have thought through what information buyers might need, what questions they might ask and what potential issues they may raise before the process begins.”

Additional survey findings:

  • Corporate development function Only 45 percent of executives at companies that completed one to four deals a year indicated that their corporate development group was extremely or very effective, as compared to 70 percent at companies that complete five or more deals annually.
  • Manufacturing sector activities Sixty-two percent of manufacturing executives said they expected the number of transactions to increase in the next two years, versus 46 percent of all respondents
  • Executive compensation Sixty-seven percent of the executives surveyed responded that compensation for corporate development executives was in the form of salary, with the remainder paid out as bonuses.
  • Talent management Respondents designated finance (88 percent), operations (82 percent), and human resources (75 percent) as the top three functions that typically participate in post-merger integration.

About the Survey

Deloitte’s online survey was completed by 309 professionals involved in M&A at their companies from April 3 to April 20, 2012. These professionals were located in the U.S. (83 percent), Europe (6 percent), Asia (3 percent), Canada (3 percent), and Latin America (1 percent). Respondents comprised heads of corporate development/M&A (20 percent), corporate development executives (20 percent), and staff (12 percent), as well as CFOs (15 percent) and CEOs/presidents (8 percent). The remainder were board directors and executives in finance, HR, tax, accounting, and other functions involved in M&A (25 percent).

Respondents represented both public (53 percent) and private (47 percent) companies. Annual revenues for these companies ranged from greater than $5 billion to less than $500 million. Here is a look at how the companies surveyed broke down in terms of size: 31 percent had revenues of more than $5 billion, 19 percent took in between $5 billion and $1 billion, 22 percent had revenues between $1 billion and $500 million, and 27 percent made less than $500 million. For the purposes of the survey, “corporate development” refers to a broad range of activities that support and enable M&A-related growth.

To download a copy of the survey, go to www.deloitte.com/us/cd2012.

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

 

 

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