Deal Flow Predictor Q3 2019

To verify the predictive nature of the Intralinks Deal Flow Predictor, we compared the data underlying the Intralinks Deal Flow Predictor with subsequent announced deal volume data reported by Refinitiv to build an econometric model (using standard statistical techniques appropriate for estimating a linear regression model) to predict the future reported volume of announced M&A transactions two quarters ahead, as recorded by Refinitiv. We engaged Analysis & Inference (“A&I”), an independent statistical consulting and data science research firm, to assess, replicate and evaluate this model. A&I’s analysis showed that our prediction model has a very high level of statistical significance, with a more than 99.9 percent probability that the Intralinks Deal Flow Predictor is a statistically significant six-month predictive indicator of announced deal data, as subsequently reported by Refinitiv. We plan to periodically update the independent statistical analysis to confirm the Intralinks Deal Flow Predictor’s continuing validity as a predictor of future M&A activity. The Intralinks Deal Flow Predictor report is provided “as is” for informational purposes only. Intralinks makes no guarantee regarding the timeliness, accuracy or completeness of the content of this report. This report is based on Intralinks’ observations and subjective interpretations of due diligence activity taking place, or proposed to take place, on Intralinks’ and other providers’ VDR platforms for a limited set of transaction types. This report is not intended to be an indicator of Intralinks’ business performance or operating results for any prior or future period. This report is not intended to convey investment advice or solicit investments of any kind whatsoever.

The Intralinks Deal Flow Predictor provides Intralinks’ perspective on the level of early-stage M&A activity taking place worldwide during any given period. The statistics contained in this report reflect the volume of VDRs opened, or proposed to be opened, through Intralinks and other providers for conducting due diligence on proposed transactions, including asset sales, divestitures, equity private placements, financings, capital raises, joint ventures, alliances and partnerships. These statistics are not adjusted for changes in Intralinks’ share of the VDR market or changes in market demand for VDR services. These statistics may not correlate to the volume of completed transactions reported by market data providers and should not be construed to represent the volume of transactions that will ultimately be consummated during any period nor of the revenue or M&A deal volume that Intralinks may generate for any financial period. Indications of future completed deal activity derived from the Intralinks Deal Flow Predictor are based on assumed rates of deals going from due diligence stage to completion. In addition, the statistics provided by market data providers regarding announced M&A transactions may be compiled with a different set of transaction types than those set forth above. Read more

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The Materials, Energy & Power and TMT sectors are predicted to lead the growth in LATAM M&A announcements over the next six months.

The Real Estate, Healthcare and TMT sectors are predicted to lead the growth in EMEA M&A announcements over the next six months.

EMEA

Intralinks six-month forecast

Deeper green = increasing early-stage M&A activity (YOY) Yellow = stable early-stage M&A activity (YOY) Deeper red = decreasing early-stage M&A activity (YOY)

The Real Estate, Energy & Power and Financials sectors are predicted to lead the growth in APAC M&A announcements over the next six months.

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LATAM

EMEA

APAC

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A gathering storm? Worldwide M&A announcements suffer setback in 2019

*Refinitiv's data on announced deal volumes for the past four quarters has been adjusted by Intralinks for expected subsequent changes in reported announced deal volumes in Refinitiv's database.

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This graph shows the year-over-year (YOY) % change in the number of announced M&A deals, as reported by Thomson Reuters, with our regional and worldwide mid-point growth forecasts for the next two quarters.

Deal Flow Predictions Through Q3 2019

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Our quarterly prediction of future trends in the global M&A market

Intralinks® Deal Flow Predictor

Mid-point forecast

High forecast

Low forecast

LATAM

The Financials, Consumer & Retail and Energy & Power sectors are predicted to lead the growth in NA M&A announcements over the next six months.

Energy & Power

Industrials

Materials

Consumer & Retail

TMT

Financials

Real Estate

Healthcare

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Deeper green = increasing early-stage M&A activity (YOY) Yellow = stable early-stage M&A activity (YOY) Deeper red = decreasing early-stage M&A activity (YOY)

Intralinks® Deal Flow Predictor

A quarterly prediction of future trends in the global M&A market

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In APAC our mid-point forecast for YOY growth in the number of announced M&A deals over the next six months is 4 percent, within a range of 12 percent to -3 percent, with the strongest growth in deal announcements expected to come from the Real Estate, Energy & Power and Financials sectors. Within APAC all regions except South East Asia and South Korea are showing growth in their volumes of early-stage M&A activity, with North Asia (China, Hong Kong), India, Japan and Australasia expected to make the strongest contributions to APAC’s growth.

In EMEA our mid-point forecast for YOY growth in the number of announced M&A deals over the next six months is 1 percent, within a range of 9 percent to -6 percent, with the strongest growth in deal announcements expected to come from the Real Estate, Healthcare and TMT sectors. Among the five largest European economies France, Germany, Italy and Spain are expected to show increased levels of M&A announcements over the next six months compared with the same period in 2018, whereas levels of M&A announcements are expected to decline in the U.K.

In LATAM our mid-point forecast for YOY growth in the number of announced M&A deals over the next six months is -6 percent, within a range of 2 percent to -12 percent, with the strongest growth in deal announcements expected to come from the Materials, Energy & Power and TMT sectors. Among the largest LATAM economies Brazil, Chile, Mexico and Peru are expected to show increased levels of M&A announcements over the next six months compared with the same period in 2018, whereas levels of M&A announcements are expected to be flat to declining in Colombia and significantly lower in Argentina.

In NA our mid-point forecast for YOY growth in the number of announced M&A deals over the next six months is 3 percent, within a range of 14 percent to -6 percent, with the strongest growth in deal announcements expected to come from the Financials, Consumer & Retail and Energy & Power sectors.

Our mid-point forecast for YOY growth in the worldwide number of announced M&A deals over the next six months is 2 percent, within a range of 11 percent to -5 percent, with the strongest growth in deal announcements expected to come from the Real Estate, Energy & Power and Financials sectors.

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Announcement Date

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This graph shows the year-over-year (YOY) % change in the number of announced M&A deals, as reported by Refinitiv, with our regional and worldwide mid-point growth forecasts for the next two quarters.

Spotlight

How digital disruption is driving M&A activity globally

Guest comment

China maintains outbound M&A aspirations in a current climate of protectionism Michael Lamla

Digitalization and disruption are buzzwords not just in the general economy but also in the M&A world. While Airbnb and Uber have long been grabbing the headlines when it comes to the discussion about the disruption that is being caused by players with a broader digital offering than their traditional counterparts, the threat from digital disruption is much wider and is affecting all sectors across the economy. As a result, the need for digitalization is driving M&A activity in a number of sectors as companies are finding their businesses disrupted.

Lamla is head of corporate banking at Agricultural Bank of China (ABC) in Frankfurt am Main/Germany. ABC offers solutions in the fields of corporate lending, guarantees, trade finance, debt capital markets and EUR/RMB clearing. He previously worked for PricewaterhouseCoopers, BNP Paribas and Helaba Landesbank Hessen-Thüringen. Additionally, Lamla has been an honorary professor at the European University Viadrina in Frankfurt (Oder) since 2009 and is a lecturer at Sorbonne University in Paris.

Spotlight

The Barclays report paints a future of disruption to the traditional industrial sectors and its key players setting up “bespoke manufacturing” factories from scratch and thus being able to offer their services, capabilities and ever slicker processes to any client, thereby undercutting these traditional manufacturers. There are a number of examples of how key industrial groups are engaging in M&A to future-proof their businesses. Siemens’ August 2018 acquisition of Mendix, a cloud-native, low code software application development platform provider, for USD 700m is a good example of the type of deals that industrial companies are engaging in to combat challenges posed by disruptors to their traditional business model. In the statement announcing the transaction, Klaus Helmrich, member of the Managing Board of Siemens, said, “We acquire Mendix to extend our leading position in digitalizing the industrial world, which is a cornerstone of our Vision 2020+.” The statement also makes it clear that while Siemens now owns the business, it will not be integrated as other acquisitions have been in the past; instead it will “retain its distinct brand and culture, and continue serving customers across the full range of industries with its unique platform and broad ecosystem and community.” Siemens will continue to invest in Mendix’s independent product roadmap, continuing its legacy as the most innovative open low-code cloud platform; at the same time the Mendix platform will be rolled out into other parts of the Siemens portfolio.

Chinese outbound M&A activity for North American and European targets seems to have cooled down significantly since the peak in 2016. Can you offer some explanations for this?

Guest comment

Professor Dr. Michael Lamla: In my view there are three issues that, combined, explain the decline in outbound M&A activity stemming from China. Firstly, China has become much more selective about M&A deals struck by state-owned enterprises. Secondly, businesses are urged to look for financing for acquisitions locally in the market where they are planning to do the deals. And finally, there is a discussion about protectionism, which in practice is not nearly as serious as the media likes to make out.

Which sectors involving foreign M&A targets have seen the greatest reductions in Chinese interest?

Market access and technology are still the key drivers when it comes to Chinese buyers’ evaluations of European targets. Historically Chinese buyers often invested into turn-around situations. There are some very successful stories. Despite our high labor costs, production has been kept in Germany, R&D enhanced and exports to Asia increased, which is actually counterintuitive to what we might expect from Chinese investors. But now with positive deal experience, Chinese investors are also looking for larger, more established businesses to acquire.

Beijing announced new capital controls as of January 1, 2017, with the aim of reducing the outflow of currency from China. How are Chinese acquirers coping with these restrictions when buying foreign assets, and how are such deals being funded?

So far, deals have been funded as loans under guarantee. In loans under guarantee, the purchaser has an RMB line of credit or cash deposit in China and then the loan gets paid out in Euros by the European branch. Thus, the transaction relies on the credit worthiness of the buyer. What we are now seeing is more local funding based on stand-alone credit worthiness. This is not only happening for new but also for existing transactions that need to be refinanced. Agricultural Bank of China Frankfurt Branch has been involved in a number of such deals, especially the last year.

What do you think the perception is among Western sellers and targets to Chinese acquirers? Is there an increased risk premium attached to Chinese bidders in an M&A process?

There is clearly a positive perception of Chinese buyers, particularly in Europe. First, they come with a clear growth agenda. Second ,they rely very much on local management. While Chinese buyers may bring in a financial controller or a CFO, they will keep R&D, production, service and administration in the hands of existing local staff. This is a significant difference to the modus operandi of, say, private equity investors or a foreign trade player and obviously works in their favor in negotiations.

A few years ago, Germany’s Mittelstand – mid-size, family-owned or controlled industrial companies with world-leading market and export positions – were seen as attractive targets by Chinese acquirers, and quite a few deals were inked. Is this still the case that Chinese acquirers are perceived as welcome and good partners for those members of Germany’s Mittelstand which have succession issues?

In a succession situation, the vendor is usually looking for a clean exit. However, Chinese buyers often lack local management capabilities and so like to first engage in a joint venture or ask for a long management transition period. We have seen some very interesting deals coming out of Germany. However, if someone is looking for a swift exit, Chinese buyers – which take a co-operative approach – might not always be the right partner.

How can Chinese acquirers overcome the current climate of M&A protectionism which seems to be overshadowing their aspirations to do deals? Are there any strategic or tactical steps they can take? Is protectionism a country - or sector-specific issue, or part of a wider trend?

There is definitely talk about protectionism, but have there been many deals scuppered by it? No, I do not see that. If in the portfolio of a large corporate there is a critical product, that concern can quite often be addressed via a carve-out ahead of the deal. Actually, I have never seen a Chinese buyer launch a hostile takeover. We shall also keep in mind that local buyers are often constrained from doing a deal for competition concerns. Or the deal may not be of interest to local buyers as they already have the market access, leaving the Chinese as the most promising prospective investors.

Finally, what is your overall outlook on China and expectations for dealmaking in 2019?

As I mentioned before, market access and technology will remain the key deal drivers, but they are by no means unique to Chinese investors – all M&A is driven by these factors. When it comes to Chinese investors, we will see an ongoing focus on established companies.

Michael, many thanks for taking the time to talk to us.

It has been my pleasure.

China maintains outbound M&A aspirations in a current climate of protectionism

How digital disruption is driving M&A activity globally

+14%

For this edition of the Intralinks Deal Flow Predictor, we spoke to Professor Dr. Michael Lamla about China’s outbound M&A aspirations.

The need to digitize is widely recognized. Almost all the private equity practitioners interviewed for PwC’s Private Equity Trend Report 2019, Powering through uncertainty say that “digitizing portfolio companies will speed up the realization of the equity story and thus decrease the holding period of the portfolio.” Data analytics along with the internet of things, artificial intelligence and robotics top the list of areas in which to invest. But where do corporates stand on this issue? They too recognize the need to digitize. But as one corporate executive said on the sidelines of a recent M&A and private equity conference, “Digitalization is not a stand-alone strategy; it needs to be at the heart of operations and every strategic initiative.”

One of the sectors seeing a huge degree of digitalization and automation is the industrials and manufacturing space, with blue chip players recognizing the need to digitalize across the entire spectrum of their products and services offering to keep up with the demands of their customers. In many instances M&A, rather than the organic development of these capabilities, is being used to satisfy customer needs. “Artificial intelligence and robotics, along with better and cheaper sensors, Internet of Things platforms and increasingly capable software will shape manufacturing in the decades to come,” according to a recent report from investment bank Barclays titled ManufacturingTech primer vol:1, Age of Hyperconnectivity and Automation.

Recognizing the need to develop these capabilities quickly, many of the leading industrial players globally are using M&A to acquire them. “In many instances it is just easier to buy the ‘disruptor’ than to try and develop the same capabilities in-house,” one digitalization expert said. A list of industrial software M&A published in the Barclays report reads like the “Who’s Who” of the industrials and manufacturing space. German industrial conglomerate Siemens and French counterparts Schneider Electric and Dassault as well as U.S. players Rockwell, Emerson and GE have been keen acquirers of assets giving them a broader digital offering. In many cases the targets are not being integrated along the traditional lines of an acquisition and instead are being given greater independence, allowing their solutions to trickle into a different part of the acquirer’s business and organically find new usages.

In the statement announcing the transaction, Klaus Helmrich, member of the Managing Board of Siemens, said, “We acquire Mendix to extend our leading position in digitalizing the industrial world, which is a cornerstone of our Vision 2020+.” The statement also makes it clear that while Siemens now owns the business, it will not be integrated as other acquisitions have been in the past; instead it will “retain its distinct brand, culture, and continue serving customers across the full range of industries with its unique platform and broad ecosystem and community.” Siemens will continue to invest in Mendix’s independent product roadmap, continuing its legacy as the most innovative open low-code cloud platform; at the same time the Mendix platform will be rolled out into other parts of the Siemens portfolio. Another significant transaction was the combination of AVEVA and Schneider Electric’s industrial software

business Schneider Electric Software into a newly enlarged AVEVA Group in which Schneider Electric is the largest shareholder. The deal is valued at more than USD 4bn and was announced in September 2017, over two years after first talks between the two parties broke down. The Financial Times quoted AVEVA chairman Philip Aiken, saying the deal would create a global leader in industrial software, which will be able to better compete on a global scale. Speed is of the essence when it comes to digitizing businesses. Players who are not able to compete with the digital disruptors in their space are left behind and will find it difficult to retain their customers. It is therefore fair to say that we will see M&A activity in this space steadily increase in the months and years to come.

https://www.pwc.de/de/finanzinvestoren/pwc-private-equity-trend-report-2019.pdf

https://www.siemens.com/investor/pool/en/investor_relations/financial_ publications/speeches_and_presentations/q32018/PR2018080264COEN.pdf

https://www.ft.com/content/411a1772-91a0-11e7-a9e6-11d2f0ebb7f0

Spotlight

In many cases the targets are not being integrated along the traditional lines of an acquisition and instead are being given greater independence, allowing their solutions to trickle into a different part of the acquirer’s business and organically find new usages. The Barclays report paints a future of disruption to the traditional industrial sectors and its key players setting up “bespoke manufacturing” factories from scratch and thus being able to offer their services, capabilities and ever slicker processes to any client, thereby undercutting these traditional manufacturers. There are a number of examples of how key industrial groups are engaging in M&A to future-proof their businesses.

Siemens’ August 2018 acquisition of Mendix, a cloud-native, low-code software application development platform provider, for USD 700m is a good example of the type of deals that industrial companies are engaging in to combat challenges posed by disruptors to their traditional business model. In the statement announcing the transaction, Klaus Helmrich, member of the Managing Board of Siemens, said, “We acquire Mendix to extend our leading position in digitalizing the industrial world, which is a cornerstone of our Vision 2020+.”4 The statement also makes it clear that while Siemens now owns the business, it will not be integrated as other acquisitions have been in the past; instead it will “retain its distinct brand, culture, and continue

serving customers across the full range of industries with its unique platform and broad ecosystem and community.” Siemens will continue to invest in Mendix’s independent product roadmap, continuing its legacy as the most innovative open low-code cloud platform; at the same time the Mendix platform will be rolled out into other parts of the Siemens portfolio. Another significant transaction was the combination of AVEVA and Schneider Electric’s industrial software business Schneider Electric Software into a newly enlarged AVEVA Group in which Schneider Electric is the largest shareholder. The deal is valued at more than USD 4bn and was announced in September 2017, over two years after first talks between the two parties broke down.5

Spotlight

The worldwide number of announced M&A deals fell by 17 percent year-over-year (YOY) in Q1 2019, the biggest such decline since 2002 and the sixth largest decline in any quarter for the past 30 years. Our predictive model forecasts that the worldwide number of M&A deals to be announced over the next two quarters is expected to increase by 2 percent YOY, within a range of 11 percent to -5 percent, with the strongest growth in worldwide deal announcements expected to come from the Real Estate, Energy & Power and Financials sectors.

A gathering storm? Worldwide M&A announcements suffer setback in 2019

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