6 Industries Primed for M&A in 2015: Media Center

By Omar Khedr on December 17th, 2014

US merger and acquisition (M&A) activity is expected to continue at a dynamic pace during 2015, benefiting from favorable economic conditions, a changing industry landscape due to the introduction of new technologies and products, shifting industry regulations and rapidly changing market forces. These fundamental factors have already lifted M&A close to precrisis levels across a range of industries. According to Bloomberg data, the 2014 US M&A deal count stands at nearly 9,000, which is a significant increase from 2013 and within sight of prerecessionary levels. In particular, accommodative interest rates and a strong-performing stock market have been supporting this upward trend. In 2015, IBISWorld estimates that an expanding US economy over the year will continue to benefit equity markets as a whole, causing stock prices to further increase. This trend will lead to further M&A transactions as sellers are more willing to accept a company’s stock as payment when equity markets expand. Moreover, borrowing rates for businesses seeking to pursue M&A activity are expected to remain supportive over the year, albeit they are expected to increase.

Analyzing more than 1,000 US industries across its database, IBISWorld has identified six industries across three sectors that are poised for a strong expansion in M&A activity over 2015. Ranked as the second-most active sector in the first half of 2014, the health care sector is expected to continue experiencing high levels of M&A activity over next year. Pharmaceutical, medical and biotech companies are participating in M&A activity to expand their product pipelines, achieve research and development (R&D) synergies and allocate their high cash balances. Consistently a hotbed of M&A activity, the Technology, Media and Telecommunications (TMT) sector is projected to remain very active in 2015 as companies adjust their strategies, capabilities and services to new technologies. Meanwhile, in the energy sector, a sharp drop in oil prices has pressured operators to streamline their operations, achieve economies of scale and gain cost synergies.

Healthcare Sector

The healthcare sector has been one of the most M&A active segments of the US economy. In the first half of 2014, this sector represented 22.0% of total US M&A deal values, driven by companies seeking to acquire valuable patents and strengthen their product pipelines for future growth. IBISWorld anticipates that the $98.5-billion US Biotechnology industry will experience annualized revenue growth of 9.1% over the next five years, including a 10.4% expansion a 2015 alone. In particular, IBISWorld found that the major companies within this industry have significant cash on their balance sheets. Based on the latest published financial statements, IBISWorld has calculated that major companies in the Biotechnology industry have on average a cash to total revenue ratio of 104.9%. In essence, this high cash balance is likely to motivate industry operators to seek out potential targets that can provide them with a higher rate of return through revenue synergies and securing new products. IBISWorld estimates that the ratio of employees per enterprise as well as establishments per enterprise in the Biotechnology industry have both been increasing since 2011; as industry operators implement cost synergies and operational efficiency, this trend is expected to carry into 2015. Enticed by the diverse product lines and the R&D synergies that could be achieved by acquiring smaller biotech firms, larger biotech players are likely to embark on further acquisitions next year to better position themselves for long-term growth.

In 2015, pharmaceutical manufacturers are expected to witness a major patent cliff that will increase competition, as firms lose many patents on their brand-name drugs. For instance, Cubist’s flagship drug, Cubicin, accounts for 81.0% of the company’s total revenue. According to the Generic Pharmaceutical Association, the next 14 months will introduce generic versions of seven of the world’s leading drugs, including Lipitor and Plavix, directly impacting drug manufacturers’ bottom lines. In response, the $163.5-billion US Brand name Pharmaceutical Manufacturing industry is expected to increase its M&A activity to gain access to new drugs, replenish and strengthen its product pipelines and achieve economies of scale. In particular, M&A activity is likely to center on the desire of pharmaceutical manufacturers to acquire firms that either have strong products currently or have potentially strong products in the pipeline. Through the examination of the six-largest companies in the industry, research spending as a percentage of total revenue has decreased from 17.7% in 2010 to 17.1% in 2013. This decreasing trend is expected to continue into 2015, as larger players opt to acquire smaller firms that already have an existing product or that are significantly ahead in research. As a consequence of this consolidation activity, IBISWorld expects the number of enterprises and employees to contract by 0.6% and 0.5%, respectively, in 2015.

Technology, Media and Telecommunications (TMT Sector)

With an ever-increasing number of mobile devices entering the US market, as well as the growth in e-commerce, demand for wireless spectrum is skyrocketing. In the five years to 2014, 
the number of mobile internet connections is expected to increase at an annualized rate of 36.8% and is forecast to widen by 10.9% in 2015. On the other hand, the supply of spectrum has not kept up. Going into 2015, this supply and demand mismatch is anticipated to cause firms in the $234.3-billion US Wireless Telecommunications Carriers industry to continue acquiring peers to build up their wireless spectrum capacity. Earlier this year, AT&T announced its intention to acquire DirectTV, while rumors circulate over a potential acquisition of Dish Network, reflective of this ongoing trend. While the top four industry operators account for 92.7% of the total market, the remaining 694 enterprises will also generate significant M&A activity, as they will be needed to secure spectrum for increasing demand. Consequently, IBISWorld projects that the number of industry enterprises will decrease by 5.9% in 2015.

The Advertising sector has changed significantly over the past five years, mainly due to businesses shifting advertising budgets away from print advertising, toward internet and mobile advertising. This trend is expected to continue going forward. In 2015, total advertising expenditure is expected to widen by 3.9%, with digital advertisements driving much of this growth. Furthermore, in the five years to 2019, IBISWorld estimates that spending on print advertising will decrease at an annualized rate of 2.1%. The $6.0-billion US Media Buying Agencies industry has been adapting by developing their in-house digital medium capabilities and by embarking on targeted acquisitions for services they had not yet developed internally. Specifically, the industry’s leading operators are attempting to scale in order to provide their customers with instant access to potential consumers across print, television and on online mediums. For instance, Omincom Group completed eight acquisitions in 2013 mainly to strengthen its digital offerings, while this past this year, Publicis acquired Sapient for $3.7 billion to boost its digital services. Illustrative of this M&A activity, which is expected to continue into next year, is the ratio increase in establishments to enterprises from 1.21 to 1.24.

Energy Sector

Over the five years to 2014, the price of key energy commodities experienced sharp increases. In particular, the world price of oil and the price of natural gas within the United States expanded at an average annual rate of 9.9% and 3.9%, respectively. Coinciding with this sharp increase has been the rapid expansion of capital projects focusing on shale oil and natural gas, much of which was funded through debt. According to Fitch Ratings, between the end of 2009 and September 2014, energy debt rose by 155.0%. However, the recent price decreases in crude oil and natural gas has put pressure on companies operating in the Oil and Gas Extraction industry. With interest rates set to rise in 2015 and crude oil prices expected to fall 14.5% over next year, many industry companies will experience cash flow constraints due to high debt levels and operating costs related to shale extraction. This problem will be further heightened in the Oil & Gas Extraction industry as total industry revenue shrinks by 0.2% next year. Consequently, larger firms with manageable debt levels are expected to embark on strategic acquisitions of smaller rivals, often at discounted valuations, in order to expand reserves and achieve further economies of scale, operational efficiencies and cost synergies. Therefore, the Oil & Gas extraction industry will experience an increase in the employee per establishment ratio, from 16.3 to 16.7 over 2014 to 2015.

With the price of crude oil expected to continue dropping, companies in the Oil and Gas Field Services industry are also looking to sharply improve their efficiency and profitability, as well as manage their high debt levels. In particular, operators in this industry will face additional pressure from oil producers to cut costs and make production sustainable amid rapidly changing oil prices. Consequently, industry consolidation is expected to increase in order to achieve operational efficiency, economies of scale and revenue synergies. Additional mergers, as exemplified by the recent announcement of the $34.6-billion acquisition of Baker Hughes by Halliburton, are expected to pick up over 2015.

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