Perspectives on M&A 2015

In today’s deal climate, we are likely to see more divestitures as buyers and sellers look for more creative ways to be strategic in their growth, according to a recent Deal Value report from Bank of America Merrill Lynch (BAML). Companies are optimizing for growth and streamlining their portfolios with divestitures of noncore assets and corporate orphans.

More Opportunities Sell-Side

In general, BAML sees 2015 as a more challenging year on the buy-side than 2014. The Report states that, “Equity markets remain near their historical highs, resulting in peak valuations in many industry verticals. Additionally, given the strength and firepower of corporate acquirers, combined with unprecedented market receptivity to transformational transactions, we should continue to see more strategic activity.”

Challenges for Private Equity

A more challenging financing environment has resulted from recent resets in debt markets due—at least, in part—to evolving investor risk profiles and new regulatory guidelines. According to BAML, “Fewer attractive opportunities will help drive a competitive dynamic in sale processes and, thus, increase purchase multiples. Last year, the competition among financial sponsors continued to be robust.”

“In fact, sponsor-to-sponsor trades accounted for nearly 50 percent of sponsor entries (leveraged buyouts) and more than 40 percent of sponsor exits. We don’t see this competitive dynamic changing in 2015. Given this, we may see more firms exploring minority/growth equity deals, where competition is less and a greater opportunity exists to implement creative deal structures.”

Strategic Growth Strategies May Result in More Divestitures

BAML expects to see the corporate separation wave continue as companies streamline their portfolios and optimize for growth. The Report notes that “Spinoffs have largely been applauded by shareholders, and we don’t expect that to change near term… Shareholder activism is on the rise across multiple industries and is up over 400 percent from a low point in 2009… The fundraising environment over the past two years has been good, and limited partnerships (LPs) are rotating more dollars to private equity as they look to enhance returns.”