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While the number of deals decreased slightly in the third quarter, with 29 compared to 33 in Q2 2010 and 32 in Q3 2009, the deal value in Q3 grew significantly, to $16 billion, compared with $7.5 billion in Q3 2009 and $10.8 billion total in the first half of 2010. Additionally, average deal value, which was $600 million in Q3, increased over the first two quarters of 2010 with $200 million in Q1 and $300 million in Q2. Average deal value in Q3 2010 was also much higher compared to Q3 2009’s $200 million average. Most of the IM activity during Q3 involved targets classified as industrial machinery and fabricated metal products manufacturers.
Despite the improvement in many global economic trends, smaller deals and transactions with undisclosed values remain drivers of overall activity. However, at the same time, the level of middle-market, large and mega-deal activity improved, with three mega-deals in Q3 compared to only two during the first half of 2010. Mega-deal value for 2010 is significantly greater than that of full-year 2009, when only one was announced the entire year. Moving forward, the near term outlook remains favorable for further improvement.
“While cash conservation, cost containment and margin expansion continue to be trends, valuations remain constrained relative to historical levels, which look to continue to present buying opportunities for industrial manufacturing companies with strong balance sheets,” said Barry Misthal, US industrial manufacturing leader, PwC. “The first three quarters of 2010 ended on a strong note, and we believe a recovery in deal activity will continue as the year draws to a close.”
Building on growth from last quarter, transactions including US targets and/or buyers continued to be key drivers of deal activity during Q3 with 41 percent of the quarter’s deals involving a US entity, an improvement over both 2009 and the first half of 2010. Similarly, almost 50 percent of total deal value during Q3 was attributable to US-affiliated activity, signaling a comeback in comparison with the 40 percent for full-year 2009 and 46 percent for year-to-date 2010. Activity affiliated with BRIC (Brazil, Russia, India and China) countries fluctuated in the first three quarters of 2010 with four deals for BRIC targets in Q3, seven in Q2 and none in the first quarter of the year. Of the four deals announced this quarter, three were for targets in China, making it the key driver of activity.
Also in Q3 2010, strategic investor contribution declined relative to prior periods. With asset valuations constrained by fundamental considerations, financial investors that have adequate capital resources, access to financing, or both, may be looking to achieve long-term strategic goals by means of increased acquisition activity. The increase in financial investor contribution in Q3 relative to prior periods continues a trend observed since 2009 that is moving the percentage of financial investments back up toward historical levels. Two of the three mega-deals in Q3 were made by financial investors, indicating that financial investors may be getting more comfortable with higher-value IM deals.