2015 was a huge year for global M&A with deal activity reaching $4.2 trillion by the middle of December.  If 2016 continues at the same pace, be prepared for a big year of M&A activity. In order to be well equipped for the upcoming year, ask yourself the following two questions when contemplating an M&A transaction.

Where are the key market opportunities?

According to the publication released by Raconteur entitled M&A Outlook 2016, on a global scale, five sectors are “blazing a trail”: financial services, telecommunications, pharmaceuticals, computer manufacturing, and oil and gas.

  • Financial Services – Consolidation is the new buzzword in the financial services sector.  Complex regulatory regimes  and the volatile economic environment has wealth managers, asset management firms, and lenders seeking opportunities to increase scale and growth as a long-term strategy.
  • Telecommunications – There is always competition to be the biggest and the best in the telecommunications sector.  M&A activity is driven by the increasing demands of consumers for greater convergence of services.  Joining forces is a smart strategic move in such a capital-intensive industry.  Similar to the financial services sector, consolidation, particularly in the European market, can be expected.   
  • Pharmaceuticals – In the pharmaceuticals industry, companies compete on the basis of scale, efficiency, new markets and innovations. The combination of Pfizer and Allergan, representing the biggest pharmaceutical deal throughout history, will likely trigger M&A activity in 2016.
  • Computer Manufacturing  Silicon Valley is ripe with deal activity.  The need to diversify and increase economies of scale is key in the computer manufacturing sector.  Steve Mollenkopf, CEO of Qualcomm, believes there will be tremendous growth in computing and resources dedicated to supporting the cloud.
  • Oil & Gas – The difficulties faced by the oil and gas industry are unparalleled.  Plunging oil prices has put pressure on companies to minimize costs leading to structural changes and M&A activity.  In 2015, transactions in the oil and gas sector focused on asset disposals but, if prices begin to stabilize, in 2016 oil and gas players may engage in larger transformational deals.

Is there an algorithm for valuing a business?

Advancements have been made to help buyers and sellers arrive at a single dollar figure but, according to Doug McPhee global head of valuation services at KPMG, “when it comes to judgment, even the most technically correct valuation is dependent on what a potential buyer would pay for a business in the current situation”.

Intangible assets such as a company’s brand are very difficult to quantify.  With that said, the International Organization for Standardization has established seven approved accounting techniques with the aim of standardizing brand valuations. Ideally, these methods would result in consistent valuations among leading algorithmic valuation services; however, this has not been the case.

Valuation service firms input anywhere between 10 and 60 data elements to arrive at a valuation of a company.  The downside is that the Apple brand, for example, has been valued at anywhere between $128 and $246 billion among leading valuation agencies.  These large valuation gaps ultimately lead one to question the usefulness and accuracy of algorithmic valuation services and standardized accounting techniques.

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