Merger Activity to Accelerate Through 2011—Report

Merger and acquisition (M&A) activity should accelerate in the second half of 2011, and the size of corporate marriages should get larger, according to the report by advisory firm PricewaterhouseCoopers.

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In the first five months of the year, the U.S. M&A market continued a resurgence that started in 2010, according to the firm. Total deal value increased to $454 billion year-to-date, a 39 percent increase over the same period last year.

Stronger cash positions on corporate balance sheets have helped the rebound.

“Corporate buyers emerged from the downturn as the dominant force in the deal market having stock-piled cash from restructuring and cutting costs during a period when growth opportunities were limited,” says Martyn Curragh, U.S. Transaction Services Leader with PwC.

The firm expects deal size to increase, as bankers become more willing to lend. “With improved financing, there is a potential for larger and more quality assets to be had and the possibility that public-to-private deals come back in vogue, which could very well result in even larger deals taking center stage at the back end of the year,” says Curragh.

According to PwC, the number of mega deals—those valued at more than $10 billion—increased 66 percent to $97 billion. That was primarily driven by the $40 billion AT&T deal with T-Mobile and the $26 billion deal between Duke Energy and Progress Energy . In historic terms, however, mega deals are still a relatively small part of the total deal mix.

PwC also notes an increase in the number of cross-border deals as investors look for growth. “We’re seeing companies get more aggressive in pursuing outbound transactions and there is a potential for these deals to get larger in value,” according to Curragh.

There were 349 cross-border deals in the first five months of this year, totaling $84 billion compared to 334 deals in the same period of 2010, totaling $46 billion, according to PwC.

The firm expects acceleration in healthcare M&A and joint venture activity, driven by cost reductions, increased productivity and development of more integrated business models. Total deal value in the healthcare sector increased 40 percent over last year.

Larger, but fewer deals led to a 35 percent spike in total deal value in the industrial products sector. In the second half of the year, PwC expects increased interest by private equity firms in the automotive, aerospace and defense industries. Divestitures are also expected in the chemicals sector. However, the firm warns that higher energy prices and commodity input costs may somewhat hamper activity.

The technology sector will also present attractive opportunities. Large transactions and higher valuations in the consumer and internet sector drove growth in total transaction value 9 percent higher in the first half of 2011.

PwC says regulatory changes and investor demand will help spur M&A activity among small- and medium-sized banks.