Wind power has a history of boom and bust cycles which has created a significant challenge for investors that are seeking to deploy capital in this sector. Currently, wind is highly dependent on government subsidies that need to be renewed periodically. The most recent extension, which was passed in early January 2013, has created a significant opportunity over the next two years, but what happened at the end of 2012 was very telling.

Dating back to the mid-nineties, private equity funds have experienced two significant bubbles driven by major economic events impacting capital fundraising: the technology bubble of 2000 followed by the “Great Recession”.  As depicted in the graphic below, private equity fundraising peaked at more than $300 billion in 2008 before sliding to less than $70 billion in 2010.  Interestingly, the annual average for the past four years was approximately $100 billion and is only slightly below the “bubble” level of FY 2000.

The supply of global energy appears to be shifting and the United States is the primary beneficiary. According to the recent International Energy Agency’s (IEA) World Energy Outlook, the world is in the process of significantly changing the countries that supply fuels as well as the types of fuels used to provide power around the world.  The headline from the report states that the global energy map is changing with the primary impetus being unconventional oil and gas production in the United States. Access to unconventional sources of oil and gas has expanded production, which has led to greater resources and better fuel pricing, spurring economic activity and changing the face of global energy trade. As a result, this and related sectors should expect high levels of investment and power industry M&A activity for many years to come.

Foreign Acquirers

The long-awaited opinion issued in late June by the U.S. Supreme Court clarified the constitutionality of the Patient Protection and Affordable Care Act of 2010 (“PPACA”).  The Court ruled that the requirement that every American carry health insurance is a tax and as a result, is constitutional.   The ruling permits the federal government to pursue a broad expansion of the Medicaid health program for the poor.

The Japanese tsunami and resulting tragic accident at the Fukushima Daiichi nuclear power plant forced a pause in the growing positive sentiment behind this source of power. While opinions appear to have turned against growth in this sector there is still substantial infrastructure that needs to be maintained. These factors might have led a number of investors and acquirers to move away from this segment and focus on other parts of the power industry. The transaction data disputes this and shows that interest in companies that serve the nuclear industry remains strong.

The healthcare industry is faced with slow revenue growth, uncertainties resulting from healthcare reform and the economy in general.  As a result, hospitals and healthcare providers are looking to cut expenses and increase efficiencies or to consolidate in the hopes of streamlining operations and gaining pull with the industry payors.  As strategic mergers and acquisitions in the sector continue, private equity firms are positioning to capitalize on this industry in transition.  BDO, the national accounting and consulting firm, recently released a study, which showed 21 percent of private equity professionals (the second largest percentage of all respondents) see the greatest opportunities for new investments, during the next 12 months, in the healthcare and biotech industries.

The abundance of natural gas in the U.S. has resulted in a number of interesting circumstances. First, the supply of natural gas has increased to the point where storage facilities are close to capacity. Second, due to high levels of supply prices have dropped dramatically, which has resulted in a greater proportion of the U.S.’s power generation being derived from this fuel. Third, prices are expected to remain low due to the high levels of supply that have yet to be tapped. Fourth, the infrastructure to transport the natural gas from the point of extraction to the end user is still being built. Fifth, natural gas is accepted as a cleaner fuel for power generation. This confluence of factors has created depressed prices for natural gas, but the segments that use and support the extraction and use of natural gas are experiencing exceptional growth not only in revenues and profits, but also merger and acquisition activity.

The volume of M&A transactions remained relatively flat in first quarter of 2012 when compared to recent periods.  However, an interesting observation is that M&A market activity now (15,488 transactions) exceeds the transaction volume of FY 2007 (12,363) by approximately 25%. Remember, that FY 2007 was the peak of activity for M&A transactions.

As we await the U.S. Supreme Court review of President Obama’s healthcare overhaul and find ourselves deep in the century-long American debate over healthcare, three issues seem clear for this industry in transition. First, regardless of the Supreme Court rulings, coverage as we have historically known it will expand and more Americans will be able to access that coverage. The issue is how much will this market grow. Second, cost and the containment of those costs must be streamlined across the healthcare value chain. And finally, businesses involved in all areas of the healthcare industry will continue to consolidate in an effort to lower cost and increase coverage or market share. Whatever one’s political views or vision of the future, these issues are the core strategic drivers of change and are at the center of driving mergers and acquisition in the U.S. healthcare industry. Obviously, the Supreme Court decision matters. Whatever the decision, these issues will continue to drive the transformation that has been set in place and will continue to fuel M&A.