The year of the Genetically Modified Organization

Corporations are undergoing a paradigm shift. They are facing rapid change fueled by disruptive technology, emerging competition from outside their industries and shifting customer preferences. Management teams that have not proactively planned for these dynamics may face swift, potentially uncomfortable adaptation.

At the same time, the US economy is growing at a slower than optimal pace. The need to outperform GDP and appease shareholders has companies acquiring innovation to outpace competition and stay relevant.

A newly elected administration in Washington defied polling data, and proving once again that established players can be disrupted at any time, has added another level of uncertainty as we look ahead to 2017.

In 2016, companies internalized the “adapt to thrive” mentality and looked to inorganic opportunities to future-proof their organizations and spark growth, understanding that organic strategies alone are not enough to keep up with the pace of change or to meet shareholder expectations.

To that end, executives shifted focus to M&A, joint ventures and alliances as fast and strategic solutions to alter their market positioning and service offerings.

2016 may come to be seen as the dawn of the precision deal, with organizations making targeted plays at a virtually molecular level — essentially altering their corporate genetics to stoke innovation or secure key talent that will extend the life and relevance of their companies.

EY - Infographic

In 2017, we will see more of these surgical deals take shape as over 75% of US executives have plans to complete a deal in the next 12 months, a majority of which would be under a billion dollars.

Precision deal making, however, doesn’t mean megadeals have gone away. As Q4 deal announcements have shown, certain industries still have room for consolidation and, at times, the best means of driving long-term growth is through a transformational deal.

2017 M&A outlook

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2017 M&A outlook


In today’s global environment, significant, organic growth is limited for large and mature companies. Instead, they must continue to explore inorganic opportunities, and they have plenty of cash to do it. Large, public US companies alone have upwards of $3 trillion in firepower - ready for deployment within and beyond their borders.

According to EY’s US Capital Confidence Barometer survey, nearly all executives who indicated they would pursue a transaction in the next twelve months are looking at deals under $1 billion.

That being said, megadeals are not facing extinction, as evidenced in several announcements made late in the year. We believe megadeals will continue, and will undoubtedly become more complex as companies shuffle their portfolios to meet transaction capital or regulatory requirements. Megadeals give birth to mega companies, and management teams are willing to go to great lengths to overcome antitrust challenges in order to achieve transformational growth.

EY – $3 trillion in firepower among lare, public US companies



Executives anticipate the valuation gap will widen in 2017, a sobering reality as a record number plan to transact in the next 12 months. What’s driving the valuation gap? Part of the problem is sellers know buyers need to transact to survive, so intense competition for premium assets has become the norm. But buyers are wary of overpaying.

Higher valuations are leaving buyers no room for error. However, big data and analytics is becoming an increasingly important transaction tool to navigate this environment. It allows buyers to expedite due diligence and more fully understand the target, including the success of its business model and growth projections.

Sector convergence is expanding transaction opportunities for both buyers and sellers. For example, consider the revolution in the automotive industry — where traditional original equipment manufacturers are wholly modifying their DNA and might soon be considered technology companies.

Widening valuation gaps continue to stifle private equity firms struggling to deploy billions in dry powder. Until conditions such as artificially low interest rates and low growth change, most agree that the existing disciplined approach will hold steady.

Not all sectors are experiencing widening valuations. For the oil industry, executives agree oil pricing will remain near $50 a barrel for the foreseeable future. This will lower valuation gaps and create substantial structural shifts across industry subsectors, increasing deal activity in 2017.

Big data and analytics are increasingly important as higher valuations endure.



In today’s global environment, significant, organic growth is limited for large and mature companies. Instead, they must continue to explore inorganic opportunities, and they have plenty of cash to do it. Large, public US companies alone have upwards of $3 trillion in firepower - ready for deployment within and beyond their borders.

Sector watch

EY - Private Equity
EY - Consumer products
EY - Diversified industrials
EY - Financial services
EY - Health
EY - Life sciences
EY - Oil and gas
EY - Technology
EY - Automotive

Private Equity: dry powder at record highs

Record fundraising and difficulty finding high-quality assets have left firms with a record $536 billion in dry powder to pursue acquisitions, 60% of which is located in the US.

Given the amount of dry powder chasing a limited number of deals, it has become more difficult to find high-quality assets that aren’t intermediated in the upper and middle markets. Auctions are no longer the primary focus, either, as funds look to demonstrate their investment edge. As a result, proprietary origination, while always a focus, is becoming more critical going into 2017.

The proprietary deal trend will favor specialized funds with increased sector knowledge to leverage when looking for new deals. This broader transformation is reflective of the quick adaptability of the private equity industry, which is unburdened by the bureaucracy of other capital sources. Buyers and sellers are also motivated by an alignment of incentives, not just at the firm/fund level, but also within the portfolio companies.

EY – Private Equity: dry powder at record highs



Consumer products and retail: the baby boom bust

EY – Consumer products and retail: the baby boom bust

Millennials are upending decades of convention. Amid low growth and margin pressures, consumer-oriented companies know they need to increase profitability and appeal to this generation to win share of wallet from consumers they are only just getting to know.

Technology’s role: the three effects

Technology has directly changed the way brands interact with their consumers. We look at three distinct “effects” that are pushing companies to reform.

The first is the Veruca Salt Effect, i.e., the “I want it now” mentality. Today, consumers can order anything and receive it either the same day or within a few days. As a result, consumer companies will need to be nimble with the management and distribution of inventory.

The second is the Mobile Effect. The proliferation of smartphones will continue to challenge consumer businesses to leverage this channel for marketing and sales.

Our final and most important observation is the Virtual Effect. Smaller brands are going directly to consumers online, skipping the physical stores by using innovative marketing and sales models. As a result, these companies have more control over operations and don’t face the same margin pressures as traditional CP&Rs.



Diversified industrials: the bionic plan

Diversified industrial product (DIP) companies must look at operational improvements, restructuring, cost optimization and working capital enhancements, in addition to seeking growth inorganically.

Partnerships and alliances will be key for industrial companies to adapt in the near term, and 79% of DIP executives indicated intentions to actively pursue acquisitions in the next 12 months, according to the CCB. Chemical companies, in particular, will experience strong M&A activity as the sector restructures over the next several years.

Risks through inorganic growth

Inorganic growth will focus on products, geographies and technology. Consumer acceptance of new products with embedded technology will take time to mature and take shape. It will be a trial and error process, as we’re seeing with certain new products, such as thermostats and smart refrigerators. Some products will evolve and be accepted while others may stumble initially.

EY – Diversified industrials: the bionic plan



Financial services: innovation up for adoption

Almost a decade after the financial crisis began, financial services organizations continue to serve many masters. Regulators, shareholders and customers are all demanding different actions from these companies as they work to remain competitive in a complex multifaceted environment.

As long as interest rates remain low — and that is a fluid question — banking and insurance institutions face a challenging earnings and growth environment. Strengthened requirements for regulated institutions have also created a wave of new market competitors including consumer and commercial lenders and alternative asset managers.

Established financial services brands are taking action to “future-proof” against a dynamically changing sector landscape.


Anywhere you can see a pain point for an individual customer, wholesale counterparty or cost inefficiencies, look for new technologies to offer a more elegant solution. It’s easy to identify the customer experience opportunities as seamless and immediate digital expectations increase.

Although there is a proliferation of FinTech companies seeking to remedy these ailments, financial services firms see opportunity to bring key innovators into the fold, effectively acquiring or partnering with start-up innovation, technology and strategy, to drive change internally. FinTechs, equally, want to be part of that solution.

They identify as the industry disrupters or change-makers that can help more established players remedy the “legacy spaghetti” — complex historical technology or processes — or introduce new blank-page paradigms such as blockchain innovation. This symbiotic dynamic will mean continued deals, joint ventures and alliances that marry two worlds together.


Roboadvisors inhabit a separate, but important corner of FinTech. The active-versus-passive debate is no secret. As the differentiated performance-versus-price equation dynamic remains a driving factor, it bolsters the case for growth in roboadvice, which can allocate investments in more passive products such as exchange traded funds (ETFs).

While performance holds, and technology can deliver instantaneous transparency into one’s current financial health, roboadvisors will continue to pique the interest of retail consumers who will demand them from start-ups and traditional players alike.

Arguably, roboadvice, through new distribution channels, has attracted a different set of customers that previously may not have been wealth and asset management participants, presenting exciting growth prospects for the industry.

Global-Local or ‘Glocal’

Navigating the challenges that come with operating globally with local governments, regulations, capital flows and market dynamics shows no signs of abating.

We will continue to see purposeful decisions by financial institutions whether to enter or exit specific geographic markets and businesses — divestitures and “divest to invest” decisions will remain on the boardroom agenda.



Health care: reform drives seismic changes

EY - Health care: reform drives seismic changes

The passage into law of the Affordable Care Act (ACA) in 2010 represented a seismic event in the history of US health care. With the goals of providing access to care to a broader population, improving the quality and driving cost-efficiencies, providers and payers are driving tectonic shifts as those markets prepare for a value-based, rather than volume- or cost-based, government reimbursement system.

It is no surprise, then, that the health care sector has experienced record M&A over the last several years and that conversations in boardrooms and C-suites today reflect high dealmaking intentions.

With the quest to reduce costs, improve quality of and access to care and care coordination — all essential elements of health care reform — providers and payers are increasingly turning to consolidation and vertical integration opportunities to build scale and control more of the care continuum.

Mergers, acquisitions, joint ventures and other forms of affiliation are enabling organizations to transform care delivery systems and improve financial viability in the wake of declining reimbursements.

We expect the mix of M&A activity to continue to move apace from Wall Street to Main Street as large-scale national activity inspires and, in some cases, necessitates local market changes. Furthermore, the imperative to drive clinical and cost efficiencies in operations and expand one’s service profile is a requisite for all health care players that may be solved for via transactions.

ACA aftershocks, such as the recently passed Medicare Access and CHIP Reauthorization Act (MACRA), are further driving reform in the provision of and payment for care. This particular legislation, which will move physicians over time to operate in a value-based reimbursement system, is yet another regulatory consolidation driver among providers and payers.

Beyond straightforward M&A, we anticipate an increase in joint ventures, corporate divestitures and carve-outs, driven by multiple factors, including strategy shifts, post-M&A integration outcomes, resource and capital reallocations and balance sheet needs.

While it remains to be seen whether the policies advanced by the president-elect and Republican-controlled Congress will represent another seismic event or be an aftershock, providers and payers will continue to self-determine their roles in achieving the goals inspired by the ACA.



Life sciences: need for growth drives deals

Transformation through M&A and divestitures should accelerate in 2017 as post-election uncertainty decreases and deal pipelines fill. Currently, 79% of life sciences executives intend to pursue a transaction in the next 12 months.

The fundamental forces of the last few years, coupled with potential changes to the ACA and tax reform including offshore cash repatriation, should enable life sciences companies to pursue healthy M&A agendas.

Near-record M&A in life sciences is poised to continue post-election, driven by the fundamental need for growth with new tailwinds, such as changes to the ACA, that could unleash increased firepower. In particular, big pharma is making strategic deals, honing portfolios and shedding non-core assets to gain scale in targeted therapeutic areas.

Alternatively, big biotech companies have mostly stayed on the sidelines despite slowing growth and pricing pressures from payers that affect the entire industry. Going into 2017, they have the substantial firepower to compete with pharma for attractive assets.

Medtech faces consolidation pressure

The medical technology segment has benefitted from recent regulatory clarity, including the suspension of the medical device excise tax. Continued consolidation is driven by the need to expand offerings as payer and provider budgets shrink.

Firms are tasked with demonstrating value to skeptical payers and providers while avoiding the disruption that new technology entrants bring. This need for new capabilities will likely result in more M&A and partnering.

EY - Life sciences: need for growth drives deals



Oil and gas: ready to be energized

EY - Oil and gas: ready to be energized

Tectonic shifts in global oil and natural gas markets continued the downward pressure on commodity prices during 2016 and drove the central concerns for oil sector growth and investment.

Structural changes in supply, including resilient North American shale and large-scale and high-rate complex major projects now coming online, coupled with slowing Asian economic expansion and consumer preferences toward fuel efficiency created a “long market” that will persist for the next five to seven years.

As a result, the industry has shifted from a survival-oriented mindset to a value-oriented mindset. Companies are now focused on managing operational excellence, cash flows and capital structure. Agility to manage value in the near-term while positioning for future growth given the lead times around “needle- moving” growth options will differentiate successful executive teams.

Many believe prices will be lower for longer, but not lower forever. This realistic outlook has now penetrated the executive mindset and is shrinking the valuation gap between buyers and sellers, potentially leading to more deals.



Technology: the perfect storm

Technology M&A is ending the year with a bang. In just 176 days leading up to October 26, 2016, five of the 10 largest technology deals in history were announced, involving players from around the world. With technology M&A leading all other major sectors in aggregate value and volume, this is going to be a year for the record books. We expect that the same underlying multiyear secular trends that have driven M&A in 2016 will continue into 2017.

Digital transformation driving demand

Driven by sector megatrends (data, mobility, cloud, social and IoT), companies across all sectors of the economy have been utilizing such tools, products and services to embark on their own digital transformations. This has driven overall underlying demand, as well as company valuations. Technology companies positioned against these growth sectors, irrespective of their position in the hardware, software or services stack, are expecting continued growth.

Convergence and consolidation

As technology companies’ customers continue to increase their reliance on technology products, they are continually looking for the optimal trade-off between selecting best-of-breed technology vendors and not having to manage too many vendors. This has driven sector convergence and consolidation as technology companies respond through M&A in seeking to offer as broad a suite of best-of-breed products/solutions as possible.

Incumbents reinvent and consolidate

As the data, mobility, cloud, social and IoT megatrends have been increasingly embraced by business and consumer users, it’s well documented that certain long-standing technology markets (e.g., PCs, servers, on-premise software) have been dislocated. Incumbents have responded by utilizing M&A to either reposition their portfolios (through both acquisitions and divestments) and/ or consolidate in an effort to reduce costs. These are common themes across the recent spate of megadeals and are evidenced across many technology markets from storage, servers and semiconductors to software and services.

M&A and the war for talent

The ability to attract the right talent continues to be a challenge for even the best-laid growth strategies. Whether it’s a technology incumbent seeking specific engineering skills or a corporate outside of the technology sector seeking software developers as part of its digital transformation, attracting talent is increasingly difficult as demand outstrips supply and as the talent pool is increasingly happy to churn jobs. Corporates have been increasingly utilizing M&A as a way to quickly tap into sought-after talent. Some technology incumbents strategically view M&A as a form of structurally outsourced R&D.

We expect that the same underlying multiyear secular trends that have driven M&A in 2016 will continue into 2017.



Automotive: rapid technology shifts remain

As rapid technological shifts change the way we do business, one industry faces the most dramatic changes to date: automotive. With the emergence of autonomous vehicles and new competitors from within the technology sector, the companies we’ve historically relied on for cars are now rivaled by the companies that produce our cell phones.

The combination of the technology and automotive sectors will influence the future viability of automotive companies as the competitive landscape widens to include technology companies like Apple and Google.

“What we’re seeing is an ‘ecosystem war’ as different schools of thought battle to decide what autonomous cars should utilize with industry and regulatory authorities sorting through the appropriate standards,” said Mark Short, EY Global Automotive and Transportation Industry Leader, Transaction Advisory Services.

Separate from the autonomous vehicle, but perhaps a more immediate development, we see more ride-sharing, which will influence the penetration rates of vehicle ownership in households. Expect to see continued refinement by automotive companies in terms of improving what they are best at, and rationalizing and divesting elements of their business where they may not rank high in market share.

In the mid-cap automotive supplier area, we expect to see an uptick in merger activity in an attempt to better leverage existing infrastructures and improve global customer penetration rates. Recent trends indicate an uptick in public-to-public transactions and acquisitions of larger privately held suppliers.

EY - Automotive: rapid technology shifts remain