NEW YORK, May 24, 2011 /PRNewswire/ — With stronger corporate balance sheets, improved availability of credit, and metal prices stabilizing, the recovery in global metals mergers and acquisitions (M&A) activity – which began in 2010 – is expected to continue for the balance of 2011, according to Forging ahead, a quarterly analysis of M&A activity in the global metals sector by PwC US.

In the first quarter of 2011, there were 26 deals with value greater than $50 million, accounting for $12.9 billion in total deal value, a 105 percent increase from $6.3 billion in the first quarter of 2010, which had two fewer deals. First quarter 2011 average deal size was $500 million, a 67 percent jump from the $300 million average deal size in the first quarter of 2010. There were four mega deals, transactions with disclosed value of at least $1 billion, announced in the first quarter of 2011. According to PwC, mega deals will continue to be an important factor in M&A activity as 2011 progresses and will likely drive increased deal values in future quarters.

The metals M&A deal market remained active in the first quarter of 2011 compared to the fourth quarter 2010 with the same number of deals announced; however, there was an 8 percent dip in deal value for deals over $50 million. The number of mega deals decreased by one in the first quarter to four deals compared to the fourth quarter of 2010 (although three of the five fourth quarter announced deals were competing bids for one company). Half of the mega deals in the first quarter of 2011 involved North American-based targets and/or acquirers.

Deal valuation, as reflected by EBITDA, increased significantly in the first quarter of 2011. This improvement, according to PwC, was likely driven by companies with cash-heavy balance sheets seeking attractive investments that could bolster organic growth.

“The metals industry continues to enjoy a promising period of M&A activity after two consecutive years of total deal value that exceeded $90 billion,” said Bob McCutcheon, U.S. metals leader at PwC. “Additionally, the trend in financial liquidity indicates that the sector is becoming better positioned to pay for new deals. A survey we conducted of the top 50 publicly traded global metals competitors reveals that these companies have, on average, significantly higher cash balances than just two quarters ago. This cash, in combination with improved availability of credit and interest rates that are extremely low, positions companies favorably to take advantage of opportunities. We expect that these trends could lead to increased activity, at least in the near term.”

For deals worth $50 million or more, the Asia and Oceania and North American regions drove overall deal value in the first quarter, with deals that have at least one entity in these regions contributing $6.7 billion and $6.1 billion, respectively. Asia and Oceania contributed 12 local deals and North America four local deals, with a combined value of $7.4 billion of the worldwide total of $7.6 billion in local deals.

In terms of inbound and outbound deals worth $50 million or more, Europe was the primary driver for outbound deals with three that contributed $2.4 billion in deal value. Asia and Oceania counted three inbound deals worth a total of $4 billion.

“Acquirers from the more advanced economies were responsible for an increased proportion of overall deal activity. Making acquisitions offers companies a number of opportunities for growth that might not be available from a strictly organic growth strategy, such as access to raw materials, entrance into new markets, and creation of larger economies of scale,” stated Jim Forbes, PwC global metals leader. “We expect that Asia and Oceania will continue to drive local deal value throughout the rest of 2011 as smaller Chinese companies combine for increased efficiency in production. It’s also our belief that Asia and Oceania will see large inbound activity as companies in other regions seek a foothold in emerging markets and look to reduce operating costs.”

Financial investors are increasing their involvement in the sector with 16 percent of deals worth more than $50 million this quarter compared with 12 percent in 2010 and just 4 percent in 2009. Financial investors also contributed to the third and fourth largest deals in the first quarter of 2011. PwC expects financial investors to remain engaged in metals deals, but notes that their focus is likely to stay on downstream targets, with upstream assets remaining primarily the domain of strategic acquirers. The reasons for this, according to PwC, include the inherent volatility, political risks, and potentially longer holding periods required for upstream acquisitions.

Targets classified as iron ore were the primary driver of activity during the first quarter of 2011, contributing almost 40 percent of the quarter’s deals worth a total of $5.1 billion. This is a significant increase over full year 2010 when iron ore only represented 20 percent of total deals. Steel targets represented a total deal value of $4.4 billion, while aluminum deals were worth $2.3 billion in the first quarter of 2011.

“The focus on iron ore deals illustrates the need for companies to integrate reliable iron ore supplies into their organizational structures. Additionally, we’ve seen an uptick in these deals due to horizontal consolidation of some of the smaller players,” added Forbes.

Gaining a competitive advantage by retaining top talent through a merger

With an increase in M&A value and activity in the first quarter, and a strong outlook for 2011, PwC notes in Forging ahead that companies in the metals industry are becoming increasingly aware that M&A value creation, strategic growth, and sustainable business success hinge on effective management of the human capital side of the equation.

“Companies engaged in merger and acquisition activity by necessity face numerous challenges. Among them are the complexities related to merging approaches, achieving synergies, reducing costs, and accessing new markets to sustain growth. Merger integration involves effectively managing multiple priorities. A staggering 70 percent of deals fail to deliver their intended benefits, often because cultural and people issues were underestimated or mismanaged,” said McCutcheon.

With so much at risk, talent issues are too often overlooked. And yet, the effective handling of cultural concerns, compensation issues, and retention of key talent is vital to the success of the newly combined organization, according to PwC.

Effectively managing the human capital side of a transaction takes on a heightened importance when considering the robust activity in the emerging markets as the metals industry has continued to expand through operations in these regions. Emerging markets are more important to their company’s future than developed markets, according to 73 percent of the 37 metals CEOs in 23 countries who responded to PwC’s 14th Annual Global CEO Survey.

Competition is expected to be fierce in emerging markets, where workers typically do not have expectations of being employed by one company for life. Consequently, finding, keeping, and motivating employees who have the right skill sets has become a top corporate priority—70 percent of the metals CEOs responding to the same survey reported that they plan to revise their people strategy “somewhat” or “significantly” to deploy more staff internationally in 2011. Nearly half of those surveyed said that they will expand their workforces during the same period.

“Identifying and retaining top talent is essential to successful integration efforts and a primary aspect of the due diligence process. Companies that successfully utilize strategies to retain employees, bridge cultural differences, and understand the emotional impact workplace changes have on employees, can increase their prospects for successful mergers and acquisitions, including a post-merger integration that proceeds smoothly from Day One,” concluded McCutcheon.

For a copy of Forging ahead, PwC’s quarterly analysis of M&A activity in the global metals sector, please visit: www.pwc.com/us/industrialproducts.

About PwC’s Global Metals practice

PwC’s Global Metals practice is composed of a worldwide network of industry professionals serving metals clients and strategically located in more than 30 countries. PwC services global clients involved in ferrous and nonferrous primary and secondary metals production by bringing experience, leading international industry practices, and a wealth of specialized resources to help solve business issues.

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2011 PwC. All rights reserved. “PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

SOURCE PwC