2013 Outlook: M&A Growth Will Return

We started 2012 with a lot of optimism. There was an abundance of cash at PEGs and on public company balance sheets. Credit markets and business valuations were favorable to well-heeled buyers.

What seemed like a perfect year for M&A growth was unexpectedly setback by European turmoil and the ensuing worldwide slowdown. In the US, election year politics led to a level of economic uncertainty not seen in the recent past.

As we look into 2013, what we see is a year of economic growth.

Worldwide, there continues to be significant slack in resource utilization, and consolidation will be the order of the day. We expect distressed M&A to dominate the European scene in 2013.

In the US, end-of-the-year deals in 2012 were done in preparation for the 2013 tax hikes, and have effectively moved a significant amount of economic activity from 2013 to 2012. In addition, the increased 2013 tax rates, coupled with uncertainty in congressional action will likely lead to a slower M&A activity in the first half of 2013.

In spite of these dampeners, deals will continue to get done due to businesses’ need to grow into emerging and high growth markets, continued favorable valuations, and cash on balance sheets. M&A activity is likely to continue at a normal pace except in a few hot segments.

The segments where we expect to see considerable action are the segments where we see transformative and disruptive activity on a wide scale. These are:

The US healthcare revolution

Adoption of Obamacare is a transformative event in the US healthcare system. The impact of this new law on all aspects of healthcare delivery, especially the supply chain, is dramatic.

Healthcare facilities, distributors, and medical device manufacturer will all have to reassess their future growth path and seek strategic partners where necessary.

While uncertainties remain in the healthcare industry due to the budget impasse, healthcare M&A will increase due to the relatively stable outlook. While this may sound US centric, the US healthcare supply channels are spread around the globe and the M&A impact will be worldwide.

We expect M&A activity in the healthcare market will start off strongly in the first half of 2013 and ramp further in the second half of the year as budget battles come to pass.

The vertical model & SaaS revolution

The staggering success of Apple’s vertical business model in delivering consumer products brought together profound changes in the way businesses delivered their products and services. Microsoft, Google, and NVidia are some examples of companies that are going vertical to enhance user experience. These vertical models are highly disruptive to the IT supply chain.

SaaS is another trend that is having a dramatic impact on the IT supply chain. Over the last few years, Software-as-a-Service has become a common delivery platform for many business applications. It is now being rapidly adopted in all market segments – consumer, commercial & government. Microsoft push of Office365 and SkyDrive demonstrates that SaaS is now a mainstream consumer solution.

The change in technology business models from products to services and verticalization will have a profound impact on all levels of the value chain, leading companies to reassess their growth strategies. We expect these changes to be a major driver of technology M&A in 2013.

The worldwide energy revolution

The roots of the shale revolution are the private property rights in the US, which let wildcatters take the risks and invest into underground resources. As the private sector and governments around the world understand the power of the shale resource, the energy industry will see a revolution in oil & gas production, leading to a sustained period of flattening or lowering of the energy prices worldwide.

The availability of cheaper energy sources in gas has the potential to dramatically change the energy supply chain, leading businesses to re-evaluate their energy and growth prospects. This transformational change will continue to drive tremendous amount of M&A in 2013.

The much maligned solar industry has come of age in 2012. As deployment costs drop, solar power can now be competitively deployed in many markets worldwide without any subsidies. 2013 will continue on the positive trends from 2012 and establish solar power as a premier alternative energy solution in many newer markets worldwide. The solar industry is highly fragmented and ripe for consolidation.

Growth and consolidation in the solar industry will contribute to significant M&A action in 2013. Low cost gas and solar will fundamentally restructure industry operations, providing interesting opportunities for businesses on the production and consumption side. Expect to see a significant fracturing and reconsolidation of the energy industry starting in 2013.

About the author: Chak Reddy is a Mergers and Acquisitions Advisor with Elite Mergers & Acquisitions, which specializes in selling and recapitalizing lower midmarket businesses with revenues between $1 million and $100 million. Chak is a business M&A and Marketing expert, and is the chief deal maker at Elite. He can be reach at creddy@elitemanda.com .

Chak Reddy

Chak Reddy is a Mergers and Acquisitions Advisor with Elite Mergers & Acquisitions. Elite specializes in selling businesses with revenues between $1 million and $100 million. Chak is a business M&A and Marketing expert in the technology and energy industries, and is the chief deal maker at Elite. He can be reached at 916-220-3052 or by email at creddy@elitemanda.com.