Presentation Transcript

1. A Perspective on Deals in 2014 Goldman, Sachs & Co. March 2014 26th Annual Tulane Corporate Law Institute
2. This presentation has been prepared by the Investment Banking Division of Goldman Sachs and is not a product of Goldman Sachs Global Investment Research. It should not be used as a basis for trading in the securities or loans of any companies named herein or for any other investment decision. This presentation does not constitute an offer to sell the securities or loans of any companies named herein or a solicitation of proxies or votes and should not be construed as consisting of investment advice. This presentation has been prepared and is based on information obtained by us from publicly available sources. In preparing this presentation, we have applied certain assumptions, have performed no due diligence, and have relied upon and assumed, without assuming any responsibility for independent verification, the accuracy and completeness of all financial, legal, regulatory, tax, accounting and other information provided to, discussed with or reviewed by us. We assume no liability for any such information. This presentation is necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to us as of, the dates indicated herein and we assume no responsibility for updating or revising this presentation. Goldman Sachs does not provide accounting, tax, or legal advice.
3. Agenda The Backdrop Is the Market Getting Better? Okay, But We’ve Seen This Before… Why? What Has Changed? Is the Recovery Durable?
4. The Backdrop
5. Global M&A Volumes Have Not Grown Since the Financial Crisis… Source: Thomson Reuters CAGR (2010-2013)= (0.3)% CAGR(2009-2013) = 4.8%
6. … And M&A Remains Low as a Proportion of Global Equity Market Cap Source: Thomson Reuters, Factset * 2014 volume is annualized as of 20 March 2014. Excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR. Average = 6.1% “Lost” M&A $908bn
7. U.S. M&A Has Been the Biggest Contributor to Volume and Growth… Source: Thomson Reuters 2009-2013 CAGR 3.7% 0.9% 8.4%
8. … Driven By a Faster Recovery of U.S. GDP and Strong Fixed Investment… % Change in GDP (YoY) % Change in Fixed Investment (YoY) Source: GS Research; Region Aggregate Nominal GDP (PPP) Weighted
9. European Corporates Still Rely Heavily on Bank Funding
10. … And European Banks Are Still in Recovery Mode Source: Bloomberg 79.1% (2.5)%
11. Cross-Border M&A Has Been a Remarkably Stable Contributor to M&A Activity Strategic Cross-Border M&A Cross-Border M&A by Industry – 2009-2014 YTD Cross-Border M&A by Industry – 2013-2014 YTD Source: Thomson Reuters. 2014 YTD as of 20 March 2014. Total volume excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR. Analysis is for deals >$250 million. * 2014 volume is annualized as of run rate on 20 March 2014.
12. Applied Materials’ Merger With Tokyo Electron Applied Materials Tokyo Electron Source: Bloomberg, Thomson Reuters September 24, 2013 +13% +9%
13. M&A Mix by Industry 2009-2012 2013-2014 YTD Source: Thomson Reuters. 2014 YTD as of 20 March 2014. Volume excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR. TMT and Natural Resources Are Going Through Significant Structural Changes
14. While Broad Financial Sponsor Activity is Growing, “Pure” LBO Activity Remains at 5% of Volume Financial Sponsors Activity (ex IPOs) LBO Activity Source: Thomson Reuters. 2014 YTD as of 20 March 2014. Total volume excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR.
15. Divestitures and Spin-Offs Are Almost Half of M&A Activity, Largely Driven by Activist Pressure… Annual Divestiture Activity Source: Thomson Reuters. 2014 YTD as of 20 March 2014. Total volume excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR. * 2014 volume is annualized as of run rate on 20 March 2014. Recent Significant Divestitures / Spin-offs
16. … Which Has Intensified as Their Funding Has Grown Source: HFR Global Hedge Fund Industry Report
17. Activism May Be the New Form of Hostile M&A Source: Thomson Reuters, Factset. 2014 is annualized based on totals as of 20 March 2014.
18. … Although Deal Jump Activity Has Been Active Source: Thomson Reuters Bidders
19. Is the Market Getting Better?
20. M&A Volumes Have Improved over the Last Three Quarters… * Estimated quarterly total for Q1 2014 based on volumes as of 20 March 2014. Source: Thomson Reuters. Global volume excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR. 2014 YTD as of 20 March 2014.
21. …With 2014 M&A Volumes Outpacing the Same Period In the Prior Two Years… Source: Thomson Reuters. 2014 as of March 20, 2014. Excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR.
22. Significant Year on Year Gains 2013-2014 Global U.S. Only Source: Thomson Reuters, as of March 25. * 2014 YTD volume excludes Charter’s bid for Time Warner Cable ($62.6 billion) ** 2014 YTD volume excludes Numericable’s bid for SFR ($16.3 billion)
23. A Shift from Tactical M&A to Strategic M&A… Source: Thomson Reuters Technology, Media & Telecom Consumer / Retail Healthcare Industrials
24. … Which is A Marked Shift in Tone Source: Thomson Reuters. U.S. targeted deals >$1 billion. Other includes negotiated share repurchases and rescues. Analysis for 2014 as of 20 March 2014.
25. Corporate Leaders are More Confident… Source: Factset Above 50 = Positive Below 50 = Negative
26. …The Impact of Share Buybacks is Less Pronounced… Note: Buyback yield is defined as shares repurchased divided by shares outstanding at the beginning of the period. Source: GS Research
27. As Interest Rates Rise, Companies Are Accelerating M&A Projects Source: Bloomberg and Thomson Reuters
28. Okay, But We’ve Seen This Before… … How Is the Market Different Today?
29. There Has Been A Demonstrable Shift Toward Shareholder Support of M&A… One-Day Indexed Stock Price Reaction for Buyers One-Week Indexed Stock Price Reaction for Buyers Note: Stock Price reaction relative to the S&P 500. Deals with transaction value greater than $1,000mm with a US public acquiror. Source: Bloomberg, Thomson Reuters, Capital IQ
30. …Which Started to Accelerate in Q3 2013… Source: Bloomberg, Thomson Reuters, Capital IQ. Deals with transaction value greater than $1,000mm with a US public acquiror. Proportion of Deals with Positive Acquiror One Day Stock Price Reactions Q1 2013 Q2 2013 Q3 2013 Q4 2013 2014 YTD
31. …Driven by Investor Sentiment Regarding EPS Impact… Source: Thomson Reuters, Company disclosure. Deals with transaction value greater than $1,000mm with a US public acquiror. ¹ Includes deals announced as dilutive or accretive in years after FY1. ² Deals that are announced as immediately accretive or accretive in FY1. Accretive Transactions2 Dilutive Transactions1 2013-2014 YTD 2009-2010 2013-2014 YTD 2009-2010
32. …And Clear Evidence That Investors Believe in the Value of EPS Accretion Again… 2009-2010 2013-2014 YTD Source: Thomson Reuters, IBES, Company’s disclosures. Deals with transaction value greater than $1,000mm with a US public acquiror. Notes: (1) FY2 accretion represents FY2 expected accretion disclosed by the acquirorwhen available, or is otherwise FY2 EPS IBES estimate immediately post close (or 6 months post announcement when close has not yet occurred) relative to FY2 EPS IBES estimate immediately pre-announcement. R² = 0.1015 R² = 0.428
33. … Strong Projected Earnings Are Driving Stock Prices Higher… Significant cost and tax synergies (96% of target’s EBITDA) Strong strategic rationale, significant revenue synergies Operational synergies and tax benefits totally more than $400mm (~30% of target’s EBITDA) Strong consolidation rationale and significant synergies (~35% of target’s EBITDA) Strategic rationale and significant synergies (~70% of target’s EBITDA) Use of leverage to finance growth, market focus on execution of forward growth plans Notes: (1) FY2 accretion represents FY2 expected accretion disclosed by the acquirorwhen available, or is otherwise FY2 EPS IBES estimate immediately post close (or 6 months post announcement when close has not yet occurred) relative to FY2 EPS IBES estimate immediately pre-announcement. (2) Stock price reaction one day post announcement is relative to the undisturbed date. Source: Thomson Reuters, Capital IQ KeyDrivers 100.0% 120.0%
34. … With Significant Underlying “Synergies” Announced Synergies as a % of Combined EBITDA Source: Bloomberg, company filings RF Micro Devices Inc / TriQuintSemiconductor Inc Actavisplc / Forest Laboratories Minerals Technologies / AMCOL International Martin Marietta Materials / Texas Industries EntegrisInc/ATMI Inc Signet Jewelers Ltd / Zale Corp BrookdaleSeniorLivingInc / Emeritus Corp Kite Realty Group Trust / Inland Diversified Real Estate Trust Comcast Corp / Time Warner Cable Inc 100.0% 150.0%
35. … Illustrated by Signet’s Acquisition of Zale… Source: Bloomberg, company filings February 19, 2014 +25% +18% 41% premium Investors expect deal to be dilutive due to the high premium Announces synergies of $100mm, representing 143% of the target’s EBITDA
36. However, Reaction Has Varied by Sector… Note: Includes deals from 2013 and 2014 YTD with a transaction value of $1,000mm or greater and a US public acquiror. Source: Capital IQ, Thomson Reuters
37. And Investors Can Still Be Cautious Energy XXI’s Acquisition of EPL Oil & Gas March 12, 2014 Source: Bloomberg, company filings Energy XXI announces the acquisition of EPL Oil & Gas for $2.2 bn Transaction was announced as additive to EPS Investors were expecting share repurchases -7%
38. Why? What Has Changed? … Positive Investor Sentiment Has Been the Missing Piece
39. There Are Fewer Opportunities to Invest in the Public Markets… Source: World Federation of Exchanges CAGR = (1.3)%
40. … And There Are Record Inflows Into Equity Mutual Funds… Source: Strategic Insight Simfunds
41. … Which Is Helping the US and European IPO Markets… US IPOs Year to Date US IPOs by Industry (2013-2014 YTD) European IPOs Year to Date European IPOs by Industry (2013-2014 YTD) Source: Dealogic and Thomson Reuters; YTD as of March 19. Industry mix based on dollar volume.
42. Investors Are Turning to “Active” Funds Again… Flows to Passive Funds ($bn) Flows to Active Funds ($bn) Source: Strategic Insight Simfunds, 2014 YTD as of Feb-14
43. … And “Active” Fund Managers Need to Create Alpha and Generate Superior Returns Cumulative Average Returns to Passive Funds (%) Cumulative Average Returns to Active Funds (%) Note: Returns are net of fees Source: Strategic Insight Simfunds
44. Which is Driving Some Investors Into Deal Stocks to Create Alpha… Source: Thomson Reuters, Bloomberg, Deals with transaction value of $2,000mm or greater, with a US public acquiror.
45. … And Some Targets To Trade Through Offer Prices... Acquiror One Week Gross Arbitrage Spread Source: Thomson Reuters, Capital IQ
46. … Until Investors Read the Filings Source: Bloomberg, company filings Smith & Nephew’s Acquisition of Arthrocare 6-Mar-2013: Arthro files a merger proxy Arthro shares trade as high as 2.5% above offer price as investors expect competing bid(s) SEC filings indicate that the company ran a full process with 8 other potential acquirors Stock price closes at offer price of $48.25 as competing bid appears unlikely
47. Is the Recovery Durable?
48. Investors Are Strongly Encouraging Companies to Invest and Grow to Fill the Growth Gap Source: Bloomberg
49. What if M&A Activity Approached Historic Levels of Relative Volumes? Source: Thomson Reuters and FactSet +38% +27% +11%
50. But… There Are Plenty of Headwinds Shareholders Shuanghui Intl / Smithfield Foods Glencore Intl / Xstrata CITIC / AsiaInfo-Linkage AT&T / T-Mobile United Parcel Service / TNT Express Deutsche Borse / NYSE Euronext Anheuser-Busch InBev / GrupoModelo AMR Corp / US Airways Silver Lake / Dell McKesson / Celesio Boise / PCA Shanghui Intl / Smithfield Foods Coca-Cola / China Huiyuan Juice BHP Billiton / Potash Corp BAE Systems / EADS Regulators Government
51. The Long Term View of M&A Market is Volatile… But Upward Trending Source: Thomson Reuters CAGR 9%