Merger and acquisition (M&A) deal activity in the global metals industry indicates that the volume and value of deals announced in the first quarter of 2010 improved moderately from the quarterly lows of 2009, according to the PricewaterhouseCoopers LLP report, Forging ahead: First-quarter 2010 global metals industry mergers and acquisitions analysis.
In the first quarter of 2010, the 21 deals announced rank above the three-year quarterly low of 17 deals announced in both the first and second quarters of 2009, although it is down from the 34 deals announced in the fourth quarter of 2009. Additionally, the $5.9 billion deal value announced in Q1 2010 remains above the three-year quarterly low of $4.6 billion in the third quarter of 2009. While deal totals have not yet fully recovered from the downturn, the environment is becoming more conducive to deal activity in the metals sector.
After a relative pause in mega deal activity in the metals sector during 2009, these deals began to reemerge in Q1 2010. Two mega deals were announced during the first quarter of 2010, exceeding the pace of 2009.
“This continuation of mega deal activity provides evidence that some acquirers are ready to engage in deal making at the higher end of the value spectrum. Supporting this are higher commodity prices, improved access to capital, and greater confidence in the strength in the recovery,” said Robert W. McCutcheon, U.S. metals leader, PricewaterhouseCoopers. “We believe that these factors have also contributed to the increased interest in controlling stakes, a trend that matches our prediction in the fourth-quarter 2009. Looking forward into 2010, the sector’s M&A flow will likely continue to grow.”
Entities from emerging and developing economies appear to have increasingly become more aggressive as acquirers of metals targets. The large increase in the proportion of deals involving these acquirers has been driven by greater involvement from Chinese acquirers. In 2009, 38 percent of acquirers were Chinese entities. In the first quarter of 2010, this proportion grew to a majority, 57 percent, of acquirers.
"Globally, the relative sense of urgency to engage in new deals is likely greatest for steel companies, which face a consolidated base of iron ore suppliers. This could lead to additional horizontal mergers among steel constituents or backward integration," said Jim Forbes, PricewaterhouseCoopers' global metals leader. “Although many strategic buyers have been slow to resume their M&A activities, we believe it is only a matter of time before these acquirers look more seriously at potential growth opportunities. A more stable global economy, generally supportive capital markets, and improved financial positions should encourage these entities to enter the deal market.”
The regional distribution of deals by acquirer region is highlighted by the influence of Chinese deals, which drove Asia & Oceania acquirer totals in the quarter. In the first quarter of 2010, four of the five largest deals and 12 of the 21 total deals involved Chinese acquirers. This regional distribution of deal activity is unlikely to change significantly through the balance of 2010, as emerging-market entities in Asia & Oceania continue to fuel much of cross-border activity among metals companies.
M&A due diligence in a recovering economy
The first quarter Forging ahead report takes a closer look at the role of M&A due diligence in a recovering economy and the impact it will have in the metals sector. As the global economy begins to recover, deal making might offer the leverage metals companies need to push ahead of the competition. It will be the companies with strong balance sheets and robust cash reserves that are in the best position for strategic merger and acquisition opportunities.
To make the right deal, metals companies must consider how two years of economic contraction have altered the balance of supply and demand within the value chain, as well as how it has significantly changed and elevated the importance of due diligence. Healthcare, climate change, commodity prices, pension plan structures, changing tax laws, company culture and the role of human resources must be factored into today's due diligence process.
M&A activity inevitably generates a certain amount of immediacy, so it pays to be prepared. Companies that might be rusty in the area of due diligence because few (if any) deals were completed during the past two years may need to dust off their existing processes and make sure the right resources are in place so they are ready when opportunity knocks.
For information on Forging ahead and to access the full report, including the special section on innovation and its potential for stimulating recovery in the metals industry, visit www.pwc.com/us/industrialproducts.