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M&A Volume Expected to Increase Next Year

M&A volume is expected to be significantly higher than in recent years, according to a new survey, with 82 percent pursuing deals in 2015 vs. 63 percent in 2014.

The survey, by KPMG and SourceMedia, the parent company of Accounting Today, polled more than 700 investors and advisors. The survey found that valuations are expected to increase year over year, with fewer M&A professionals expecting to pursue deals under $250 million, and more expecting to do deals valued upwards of $250 million, $500 million and $1 billion.

Forty-seven percent of respondents expect the most transaction activity in 2015 to occur in the technology sector, followed by the pharmaceutical and biotechnology (33 percent), financial services (30 percent) and oil and gas (27 percent) sectors.

“Economic fundamentals that drive M&A are back at pre-crisis levels, with corporations holding large cash reserves, interest rates remaining historically low, consumer confidence improving and the U.S. dollar becoming stronger,” said Dan Tiemann, KPMG’s national leader for transactions and restructuring, in a statement. “Organic growth often offers limited growth prospects, so buyers are paying a premium for targets that will allow them to realize long-term strategic goals and gain an advantage over the competition.”

U.S. organizations are expected to keep most of their M&A deals close to home, with survey respondents anticipating a drop in cross-border M&A expectations year over year.

A healthy 73 percent of the survey respondents expect the U.S. to be the most active market for transaction activity in 2015, up from 56 percent in 2014. That percentage contrasts with drops in other regions, including in Western Europe, China and Brazil.

Large cash reserves are expected to be the main driver of deal activity in 2015, according to 40 percent of the M&A professionals, followed by strategic fit at 21 percent. However, 27 percent believe deal activity could be inhibited by a lack of suitable targets.

Thirty-five percent indicated they review their company’s portfolio of assets on a monthly basis for potential acquisition candidates, followed by 27 percent who review their portfolio quarterly. New product development (38 percent) and geographic expansion (28 percent) will drive 2015 revenue growth for those not planning to pursue transactions. Sale to a strategic buyer is expected to be the top exit strategy in 2015, according to 64 percent.

“Finding assets that will generate returns to satisfy investors has proven difficult for corporations and private equity firms alike. Acquirers are taking thoughtful, strategic approaches and, in some cases, this means walking away from overpriced deals,” said Tiemann. 

Fifty percent of respondents indicated that assessment or volatility of future revenue streams is the most challenging due diligence issue, and that the greatest challenge during the integration process is related to culture and human resources (53 percent). Forty-three percent of the M&A professionals cited a well-executed integration plan as the most important factor for deal success.