September 2010- A PricewaterhouseCoopers LLP report, "Forging ahead: Second-quarter 2010 global metals industry mergers and acquisitions analysis," indicated continued improvement in metals deal activity, as measured by deal value.
According to PwC, "A notable trend in the metals sector during the second quarter of 2010 was the migration of M&A activity away from the small and middle segments of the market toward larger transactions. This movement was exemplified by five announced ‘mega deals,’ categorized as deals with a disclosed value of at least $1 billion, which equals the total number of announcements for all of 2009 and more than doubles the two mega deals announced in Q1 2010."
That mega deal activity bolstered the $16.8 billion value of deals announced in the second quarter, "which represented the highest total since the second quarter of 2009," according to a press release. PwC believes this trend gives a reason to be optimistic about the future, "as potential acquirers continue to focus less on internal cost and liquidity initiatives associated with the recent downturn and instead, show signs of improved confidence and engagement in larger strategic acquisitions."
Although deal value increased in the second quarter, the 20 deals announced were "on par with the 22 deals announced in Q1 2010, and total 2010 deal activity accounted for over 2 percent of M&A activity across all industries. These trends indicate that M&A activity may be more closely associated with fluctuations in commodity prices rather than general economic recovery, as is evidenced by the fact that metals M&A contribution has mostly increased since the early- to mid-2000s, mirroring a generally strong commodity price environment."
"It does seem clear that we are entering a period in which more buyers are looking to augment organic growth opportunities through a variety of M&A strategies beyond the backward integration that has driven recent quarterly totals," said Bob McCutcheon, U.S. metals leader at PricewaterhouseCoopers, in a press release. "We believe that this trend in activity is a positive indication for future deal flow, contributing to our relatively optimistic outlook for metals M&A activity over the second half of 2010."
Sector activity driven by steel
"In keeping with our previous expectations, steel and iron ore deals remain the primary driver of sector activity. Interest in steel and iron ore is likely to continue and may be supported by the industry movement toward quarterly iron ore pricing," said Jim Forbes, PricewaterhouseCoopers’ global metals leader, in a press release. "Such pricing could enhance the desire of Chinese companies to mitigate supply risks by engaging in mining deals."
The report pointed out the importance of the merger integration planning process, and said, "Metals companies must balance a desire to quickly reach the finish line with a need to systematically leverage synergies and contain costs."
Ultimately, capturing deal value is tougher than closing the deal itself. "However, because most metals deals are cross border, there is an added complexity of not only integrating the operations, finances and business processes but also harmonizing or even redefining culture. The integration of two metals companies also requires careful supply chain analysis to ensure end-to-end coordination so that the new company realizes the benefits of the transaction."
"Closing deals is tough, but capturing deal value is even tougher. In some ways, deciding whether to go forward with a merger or acquisition is the easy part and the act of ‘owning’ after the transaction is complete is the real challenge. In the end, the market will reward or punish shareholders of the combined company, depending on how well its management succeeds at achieving stated deal objectives. For this reason, it is imperative that synergies are realized, deal value is captured and the resulting performance is communicated to all those with a stake in the outcome." MM