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Annual Mergers and Acquisitions Survey, October 2006 

Published: October, 2006

Submission: October, 2006

 



Respondents to Dykema's 2006 M&A survey generally maintain a positive outlook on the future of the U.S. mergers and acquisitions market. Responses were received from both company executives and their outside advisors. Survey respondents are looking toward strategic buyers as an increased presence in the coming year, but also forecast significant involvement by financial and foreign buyers. Nearly two-thirds of respondents believe they will be involved in an acquisition in the next year, giving them a good reason to keep a close watch on the M&A market. Since significant input was received from survey respondents based in Illinois and Michigan, their responses were separately analyzed for regional trends. Where there was overlap, responses to 2006 survey questions were also compared to responses to last year's survey.

Highlights of Dykema's 2006 survey include: 

  • 64 percent of participants believe the M&A market will be strong in the coming year. In a slight increase from last year, 47 percent attributed the strength of the current M&A market to an active private equity market, while 26 percent attributed it to strategic buyers.

  • 44 percent of respondents agreed that most foreign buyers in the U.S. M&A market in the next 12 months will come from China. Survey analysts note that Chinese investors in the U.S. M&A market are generally more visible shoppers than those from India because they tend to come to the market in groups.

  • When dealing with outbound cross-border mergers and acquisitions, respondents worry about doing effective due diligence (42 percent) and the absence of a predictable, transparent legal environment (35 percent). When dealing with inbound cross-border deals, they are again concerned about due diligence (36 percent) as well as labor issues (32 percent).

  • Advisors and company respondents disagreed on how hot the M&A market will be for specific industries. 24 percent of company respondents selected the automotive industry, 21 percent chose technology, and 11 percent chose biotechnology and life sciences as the industry which will see the most global activity in the coming year. 18 percent of advisor respondents selected energy, 18 percent said technology, and 16 percent named the automotive industry. Respondents were asked to share their thoughts on the U.S. and international mergers and acquisitions market.

The following represent select verbatims received from survey respondents.
  • The limited accessibility of the public markets to small/medium businesses is keeping transaction valuations reasonable as an alternative to organic growth.
  • Record setting fund raising in the last two years will lead to more activity for financial buyers Financial buyer activity is quite strong already, and we believe this activity will continue. Strategic should be active. However, financial buyers finance transactions more aggressively; and, foreign buyers continue to pursue a U.S. presence.
  • The dollar has recently gained strength, but is relatively low compared to where it was three years ago. We have been seeing increased inquiries from foreign buyers during 2006. Unless the dollar rises significantly, we believe this trend should continue I believe that there is still too much investor money chasing too few deals.
  • Strategic buyers have started to become more active with more realistic valuations. PEG's continue to be active, but access to the debt markets is beginning to moderate, impacting their willingness to overpay for deals Weak dollar will make select US takeover targets more attractive.
  • Slower economy will create opportunities as the weak get eaten I believe that many of the transactions will be more transformational in nature vs. financial which leads me to believe that many organizations are looking to add more strategic relevance to their organizations vs. just to grow.
  • There is currently a mountain of money begging to be invested and return expectations have been somewhat reduced.
  • As the US economy weakens foreign investors will look to expand their businesses and holdings in the US The world economy is forcing all companies to get more strategic in their holdings and where they do business. Foreign buyers will be strategic buyers. Strategic buyers have built up sizable cash reserves on their balance sheets. With the economy slowing they will be pressured to make acquisitions to grow their businesses In the financial institutions industry, we are seeing the big Wall Street firms buying up mortgage companies. We perceive this as a strategic buyer, as the banks are seeking to have the whole supply chain, from origination to bonds sold to international buyers. But, these transactions may not be the most frequent.
  • Equity investors are rich with liquidity and are actively seeking good deals to invest in.
  • Real estate is slowing down and investors are seeking alternative sources to place their money.
  • It appears that the fund markets are driving prices instead of letting supply and demand drive prices There is upside potential in certain unaddressed markets within the US - these investment and growth options can, and will, drive business in an expanded manner into the national economy
  • The M&A climate is no longer the growth vehicle it was during the 90's and the regulatory environment is bringing more caution to the activity Investors are not looking for short-term opportunity as much as long-term strength, synergy and stability A strong economy and hot M&A market has driven up prices, making it a "sellers market". This will likely discourage the true financial buyer that is seeking a "bargain"; Financial buyers do not have the management or operational experience to turn around decreasing revenue companies. Strategic buyers will be more motivated to merge acquired assets into their operations, more optimistic Strategic buyers want to buy when there is blood on the streets, not confetti


2006 Mergers & Acquisitions Survey Results
Respondents were asked to complete a short questionnaire designed to measure attitudes and perspectives on the future of the U.S. M&A market. The following charts represent the collective input of 200 respondents to the survey. A full overview of the survey methodology can be found at the end of this report.

1. How strong will the overall U.S. M&A market be during the next 12 months?

    Responses Total %
    Strong 127 64%
    Neutral 67 34%
    Weak 6 3%

    Total Responses 200


    • 64 percent of survey respondents saw the future of the M&A market as strong. Last year, 81 percent of all respondents saw the future of the M&A market as positive or somewhat positive. Advisors were slightly more confident than company respondents on the future of the U.S. M&A market, with 67 percent responding that they thought the market would be strong. 59 percent of company respondents agreed.
    • Illinois respondents were particularly bullish about the M&A market with 77 percent saying they believe the U.S. M&A market will be strong in the coming year. 58 percent of Michigan respondents believe the U.S. M&A market will be strong in the coming year. 38 percent of Michigan respondents and 21 percent of Illinois respondents had a neutral view of the market.


    2. Which of the following is most responsible for fueling current U.S. M&A active?

    Responses Total %
    Strong U.S. economy 12 6%
    Strategic buyers 52 26%
    Private equity buyers 93 47%
    Foreign buyers 18 9%
    Robust financial markets 6 3%
    Other 10 5%
    Total Responses 199


    In a continued trend, about 47 percent of respondents feel current M&A activity is being fueled by private equity buyers, up from 32 percent last year. Both Michigan (45 percent) and Illinois (46 percent) respondents feel private equity buyers were most responsible for fueling current activity. However, 30 percent of Michigan respondents said strategic buyers have the most influence compared to only 15 percent of Illinois respondents, who split their votes across most of the categories. While advisors and company respondents agreed that private equity buyers are fueling current M&A activity, 32 percent of company respondents chose strategic buyers, as opposed to only 20 percent of advisors. Last year, there was disagreement among advisors and company respondents on the factors that are fueling the strong M&A market. 39 percent of advisors believed that the M&A market was being fueled by the active private equity market. 37 percent of company respondents felt the re-emergence of strategic buyers was the dominating factor.

    3. What is your outlook for the U.S. economy, generally, over the next 12 months?


    Responses Total %
    Positive 74 37%
    Neutral 93 47%
    Negative 33 17%
    Total Responses 200


    47 percent of respondents have a neutral outlook for the U.S. economy in the next year, and 37 percent have a positive outlook. Last year, 51 percent of participants maintained a positive or somewhat positive outlook on the U.S. economy, and 23 percent felt neutral about the economy's strength in the coming year. 48 percent of respondents who believe the outlook for the U.S. M&A market is strong, have a positive outlook for the U.S. economy, and 43 percent have a neutral outlook. The majority of advisor respondents (52 percent) have a neutral outlook on the economy. Company respondents were more divided, with 42 percent saying they have a neutral outlook and 38 percent saying they are positive about the future of the U.S. economy. Last year, advisors had an overwhelming 88 percent neutral, somewhat positive or positive outlook on the economy, while company respondents were split between the negatives (40 percent) and the positives (42 percent).

    4. Which of the following buyers will INCREASE their presence the most in the U.S. M&A Market over the next 12 months (as a percentage of total transactions)?


    Responses Total %
    Strategic buyers 87 44%
    Financial buyers 68 34%
    Foreign buyers 43 22%
    Total Responses 198


    Survey results indicate that there is more emphasis on strategic buyers than there was 12 months ago. Last year, 54 percent of respondents felt the presence of foreign buyers would increase in the coming year, 44 percent felt strategic buyers would increase, and 28 percent felt financial buyers would increase. Survey analysts note that in recent months, many more strategic buyers have aligned themselves with private equity funds to limit downside risk and capitalize on fund expertise. The frenetic pace created by private equity buyers has created a defensive approach for strategic buyers. As more sellers want to cash-in, the market presents opportunities that strategic buyers cannot ignore.

    5. Which of the following buyers will DECREASE their presence the most in the U.S. M&A Market over the next 12 months (as a percentage of total transactions)?


    Responses Total %
    Strategic buyers 42 22%
    Financial buyers 73 38%
    Foreign buyers 75 39%
    Total Responses 190


    Advisor and company respondents were split on this question. 40 percent of advisors thought financial buyers would decrease their presence the most, 33 percent selected foreign buyers, and 21 percent pointed to strategic buyers. Company respondents picked foreign buyers as their top choice (42 percent), followed by financial buyers (32 percent), and strategic buyers (22 percent). Survey analysts believe that as the U.S. economy moves forward, strategic buyers will be less focused on internal growth and active in growing through acquisition.
     
    6. Which of the following types of buyers have been most responsible for high company valuations over the past 12 months?

    Responses Total %
    Strategic buyers 49 25%
    Financial buyers 99 50%
    Foreign buyers 20 10%
    None of the above 29 15%
    Total Responses 197


    • 25 percent of respondents thought strategic buyers had the most influence driving up deal valuations, down from 38 percent last year. Opinions regarding financial and foreign buyers were similar to last year when 49 percent of participants felt financial buyers were most responsible for high valuations and 12 percent of participants felt foreign buyers had the most influence.
    • 49 percent of respondents who said strategic buyers are most responsible for high company valuations believe that private equity buyers are fueling the current M&A market.
    • 49 percent of respondents who said financial buyers are most responsible for high company valuations also believe that private equity buyers are fueling the current M&A market.
    • 35 percent of respondents who said foreign buyers are most responsible for high company valuations also believe that foreign buyers are fueling the current M&A market.
    • 30 percent thought private equity buyers are fueling the market and 30 percent selected strategic buyers.
    • A majority of advisor respondents (60 percent) thought financial buyers were most responsible for high company valuations, followed by 18 percent who pointed to strategic buyers. Company respondents were somewhat more split in their responses, with 40 percent selecting financial buyers and 31 percent choosing strategic buyers.

    7. What sector will see the most M&A activity, globally, in the next 12 months?


    Responses Total %
    Automotive 40 20%
    Biotechnology and Life Sciences 20 10%
    Energy 27 14%
    Financial Services 2 11%
    Healthcare 19 10%
    Manufacturing (non-automotive) 22 11%
    Technology 7 19%
    Telecommunications 7 4%
    Other (please specify) 3 2%
    Total Responses 197


    • 24 percent of company respondents selected the automotive industry, 21 percent chose technology, and 11 percent chose biotechnology and life sciences as the industry which will see the most global activity in the coming year. 18 percent of advisor respondents selected energy, 18 percent said technology, and 16 percent named the automotive industry. Last year, more company respondents (27 percent) looked towards the technology industry, while advisors were divided between healthcare (16 percent), biotechnology and life sciences (16 percent), and financial services (14 percent).
    • Last year, respondents were similarly split in their opinions on which industries would see the most M&A activity in the next 12 months. Technology slightly led last year at 18 percent. Illinois respondents to the survey selected energy (21 percent) first, followed by technology (17 percent), non-automotive manufacturing (15 percent) and biotechnology and life sciences (13 percent).
    • Illinois has seen a number of public energy companies exiting the market which are currently selling off assets. Survey analysts point out that despite the recent Illinois power auction, the state has had a ten-year rate freeze. Anticipated energy legislative action may cause movement in the industry.
    • Michigan respondents felt the automotive industry (26 percent) will see the most global activity in the coming year, followed by technology (19 percent) and financial services (12 percent).

    8. Where will the most foreign buyers in the US M&A market come from in the next 12 months?


    Responses Total %
    Australia 4 2%
    Brazil 2 1%
    China 80 44%
    France 2 1%
    Germany 25 14%
    India 19 10%
    Japan 23 13%
    Mexico 0 0%
    United Kingdom 21 11%
    Other (please specify) 7 4%
    Total Responses 183


    • Both Illinois (50 percent) and Michigan (36 percent) respondents agreed that most foreign buyers in the U.S. M&A market will come from China. Survey analysts note that Chinese investors in the U.S. M&A market are generally more visible shoppers than those from India because they tend to come to the market in groups.
    • The second choice for Illinois respondents was the United Kingdom (13 percent). After China, Michigan respondents pointed to Japan (16 percent), Germany (14 percent), and India (11 percent).
    • Michigan responses may be related to the influence of the automotive industry in the state.


    9. What is the single biggest challenge you encounter when dealing with OUTBOUND cross-border mergers and acquisitions?
     

    Responses Total %
    Doing effective due diligence 76 42%
    Absence of a predictable, transparent legal environment 63 35%
    Corrupt legal compliance 6 3%
    Impact on employees and other labor issues 20 11%
    Impact on other stakeholders 3 2%
    Other (please specify) 11 6%
    Total Responses 179


    43 percent of Michigan respondents said doing effective due diligence is the biggest challenge to outbound cross-border mergers and acquisitions. Illinois respondents were most concerned with the absence of a predictable, transparent legal environment (36 percent).

    10. What is the single biggest challenge you encounter when dealing with INBOUND cross-border mergers and acquisitions?


    Responses Total %
    Doing effective due diligence 63 36%
    Absence of a predictable, transparent legal environment 12 7%
    Corrupt legal compliance 2 1%
    Impact on employees and other labor issues 56 32%
    Impact on other stakeholders 29 17%
    Other (please specify) 12 7%
    Total Responses 174
     


    • Those respondents who felt that the most foreign buyers in the U.S. M&A market will come from China are most concerned about doing effective due diligence (38 percent), followed by labor issues (35 percent). Respondents who felt that the most foreign buyers in the U.S. M&A market will come from a European nation are also most concerned about doing effective due diligence (35 percent), but are not as concerned about labor issues (25 percent).
    • Michigan respondents again said doing effective due diligence (34 percent) is the biggest challenge to outbound cross-border mergers and acquisitions, followed by labor issues (27 percent). Illinois respondents were most concerned with labor issues (31 percent) followed by due diligence (29 percent).


    11. Where will the next major U.S. cross-border investment activity occur after China, India and Mexico?


    Responses Total %
    Brazil 51 28%
    Philippines 6 3%
    Romania 9 5%
    Russia 31 17%
    South Africa 6 3%
    Thailand 8 4%
    Turkey 6 3%
    United Arab Emirates 25 14%
    Vietnam 23 13%
    Other (please specify) 16 9%
    Total Responses 181


    Most respondents selected Brazil as the country most likely to see major cross-border investment activity after China, India, and Mexico. Survey analysts note that the Brazilian economy is fairly stable in comparison to other South American economies.

    12. In the next 12 months, do you believe your company will be involved in an acquisition?


    Responses Total %
    Yes 126 64%
    no 72 36%
    Total Responses 198


    60 percent of all respondents who identified themselves as a company officer or executive felt they would be involved in an acquisition in the coming year. 57 percent of Michigan company respondents said they believe their company will be involved in an acquisition in the next year. 69 percent of Illinois company respondents said they believe their company will be involved in an acquisition in the next year.

    13. In the next 12 months, do you believe your company will be sold, downsized, or involved in a spinoff?


    Responses Total %
    Yes 41 21%
    no 155 79%
    Total Responses 196


    32 percent of all respondents who identified themselves as a company officer or executive felt their company will be involved in a sale, downsizing, or spinoff in the coming year. 33 percent of Michigan company respondents said they believe their company will be sold, downsized, or involved in a spinoff in the next 12 months. 38 percent of Illinois company respondents said they believe their company will be involved in a sale, downsizing, or spinoff.

    Methodology


    In September 2006, Dykema distributed a survey via e-mail to a group of approximately 6,000 senior executives and advisors. The survey was completed by 200 respondents. The survey coincides with Dykema¡¦s Mergers & Acquisitions Seminars, which will be held in Grand Rapids on October 11, in Chicago on October 12, and in Detroit on October 17, 2006, and will be attended by many of the industry leaders whose responses are included in the survey. The 2006 survey is the second annual M&A analysis developed by Dykema. This year¡¦s survey included some questions from the previous survey for comparison, and asked respondents a number of new questions related to cross-border mergers and acquisitions. Some questions asked this year are similar to the 2005 survey, but the wording may not be identical. Because a significant number of survey participants said they are based in Illinois (52) and Michigan (132), their responses were broken out of the full survey and tallied to analyze for regional perspective. Survey respondents were not asked their location in 2005, so no regional comparison between the two surveys is available. Due to rounding, all percentages used in all questions may not add up to 100 percent. A few small edits were made to select verbatim responses to correct spelling and verb tense.

           


           

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