According to a report from Ernst & Young, the mergers and acquisitions (M&A) market has been dismal for the first half of this year. The number of deals — which came to 3,159 — fell by 15%, and the aggregate deal value was off by 43%. Despite all this, you can find signs of optimism.
Keep in mind that the ultimate driver for M&A is confidence in the boardroom. Unfortunately, this has remained fairly shaky. The situation in Europe has been volatile. At the same time, economic growth is slowing the U.S., China and Brazil.
In such an environment, it’s tough for a CEO to pull the trigger on a deal. Yet, in some cases, there’s no choice.
So, what industries are likely to be acquisitive despite the risks? Let’s take a look:
Energy: In the first half of 2012, the sector saw a 37% increase in deal value to $55.8 billion. But it could see much more action. The oil giants — like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) — are sitting on piles of cash. More important, they need to find ways to replenish their reserves as well as to move into new areas, like shale oil.
In fact, the recent fall-off in crude prices could be a catalyst because the valuations of potential targets are likely to be more attractive.
Pharma: The industry really has little choice but to ramp up its dealmaking. According to Bloomberg, pharma companies lost patent protection on drugs that did $34 billion in sales last year. The forecast is for that figure to increase to a whopping $147 billion by 2015.
This is a huge hole to fill. Unfortunately, the pharma companies have had a tough time getting results from their internal R&D initiatives.
Thus, the only choice is to engage in M&A. And it could start soon. Already this week, Bristol-Myers Squibb (NYSE:BMY) agreed to pay $5.3 billion in cash for Amylin (NASDAQ:AMLN) plus $1.7 billion to assume debt and other obligations. The attraction for BMY? Amylin is a top player in the lucrative but highly competitive diabetes market.
Technology: The industry is seeing a variety of major megatrends, such as social media, cloud computing, virtualization and big data. The problem is that the large tech operators usually can’t keep up with such innovation. So, their main approach is to buy smaller companies with more cutting-edge technology.
For the most part, it looks like the primary targets will be software companies. They tend to have high margins and strong growth profiles. Besides, they could benefit from the huge distribution footprints of traditional tech companies.
Consider some recent deals, such as Microsoft‘s (NASDAQ:MSFT) agreement to pay $1.2 billion for Yammer, which is a sort-of Facebook (NASDAQ:FB) app for the enterprise.
Plus, over the past year there have been many successful IPOs in the cloud sector, such as Bazaarvoice (NASDAQ:BV), ExactTarget (NYSE:ET), ServiceNow (NYSE:NOW) and Demandware (NYSE:DWRE). They’re all possible buyout targets. And there are many big huge potential suitors. Just some include IBM (NYSE:IBM), Hewlett-Packard (NYSE:HPQ) and BMC (NYSE:BMC).
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from
Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.