Sectors Ripe for Business Consolidation in 2014

2014 promises to be a big year for mergers and acquisitions, with the value of deals worldwide hitting $2.4 trillion, $982 billion in the U.S. alone. Though still well below prerecession peaks, that’s a solid 10% increase from 2013 in both cases.

U.S. Economy Likely to Improve in 2014

One reason for the increase is the abundant financial resources available to businesses. Start with the $1.93 trillion in cash that corporations are sitting on. Add to that the buoyant stock markets, strong profit growth and low interest rates. All help provide the wherewithal to grow.

A second reason we expect to see more M&A activity this year is the brisker economic tempo, promising good returns to businesses that expand. “The intensity of merger activity and the health of the economy go hand in hand; if the economy is stable or growing, then M&A activity is going to be stable or growing, too,” says Amanda Levin, editor of Mergermarket in New York. “I think that companies feel more confident about the economy’s potential, and as long as that continues we’ll see a pickup in activity.”

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Budget détente in Washington helps, too. After many months of disruptive partisan warfare, the current quiet is soothing corporate executives’ worries about fiscal cutbacks.

For smaller firms, demographics play a role as well. Baby boomer business owners are reaching the stage when they want to cash out and retire. Selling to a larger firm offers them a convenient exit strategy. “This is the middle market, generally businesses valued at $1 billion or less, many of them family owned and less affected by things like government shutdowns that may influence bigger companies’ decisions,” Levin notes. “So when it is time for them to sell, because of age or a wish to pass on the business or whatever, they sell.”

Among sectors ripe for consolidation:

Technology. Deep-pocketed, mature firms will aim to position themselves for future growth by acquiring the latest innovations through takeovers. Start-ups in California’s Silicon Valley, Austin, Texas, Boston and elsewhere are more likely to find eager suitors than in some past years.

Energy. With the U.S. poised to become a net exporter of oil by 2020 and decades of natural gas supplies available to be tapped, oil and gas exploration and development are fertile ground for M&A activity. Smaller operators in the oil and gas boom are well positioned to cash in while their bigger brethren seek economies of scale. Also likely to see consolidation: Utilities plus power generation and mining firms.

Media and communications. Sirius XM Holdings, for example, is being courted by majority owner Liberty Media. Also lots of activity among cable firms, beefing up to better compete with giant Comcast. Charter Communications’ aggressive wooing of Time Warner Cable has already spurred a $61-billion proposal -- and gotten a no.

Health care providers, driven partly by Obamacare. To maintain revenues, some providers will expand by taking over others -- especially smaller independents -- that see a sale or partnership as better than sticking out a tougher environment alone.

Pharmaceuticals. Powerhouses, such as Bristol-Myers Squibb and Merck, will be on the prowl, seeking access to promising cancer, antiviral and specialty drugs. And, driven partly by expiring patents on some of their well-known profit generators, they’ll likely try to position themselves to compete better with generic medicines.

And retail, especially bricks-and-mortar firms, as online competitors continue to strip away sales. Firms, such as American Eagle Outfitters, with not much debt, strong cash generation and good brand recognition are likely to be attractive targets.