The first half suggests that 2014 will be a record year for M&A in pharmaceuticals, with the size of deals having increased substantially over prior years. In 2011, the deal volume in the pharmaceutical sector totaled $98 billion, and then decreased to $79 billion in 2012 and $72 billion in 2013. In the first half of 2014, the deal value jumped to $69 billion already. Chemical sector deal volumes have shown more fluctuation over the past years. Deal values were $81 billion in 2011 then dropped to $32 billion in 2012 and climbed to $51 billion last year. From January through June 2014 Chemical sector M&A transactions remained flat at $17 billion.

Pharmaceuticals

US continues to dominate the market with nine of the global top 10 completed deals involving US pharmaceutical companies. With approximately $310 billion in announced deals, M&A activity in the pharmaceuticals industry has increased significantly in the first half of 2014. The key deal drivers are pipeline replenishments, specialization, financial optimization and portfolio consolidation.

Creative structuring and asset swaps are being deployed to help pharmaceutical players secure deals to grow their core businesses, while exiting non-core activities at the same time. Investor groups are increasingly active in pharmaceuticals, representing 23% of the number of deals completed in Q2 2014. These range from smaller biotech investments to large LBOs such as Carlyle's investment in Johnson&Johnson's Ortho Clinical Diagnostics unit for $4.2 billion.

McKesson Corp., one of the largest US pharmaceutical wholesalers with 2013 sales of $137 billion completed its acquisition of 75.93% of Celesio for $6.8 billion in 2014.

In April 2014, Novartis, as part of its strategic portfolio review, announced an innovative deal to trade assets. As part of the complex three-way deal, Novartis will swap its vaccine business for Glaxo SmithKline's (GSK) cancer assets positioning it as a leader in treating melanoma cancer. The deal also includes entering into a joint venture with GSK to create one of the largest consumer healthcare businesses. In parallel, Novartis struck a deal to exit the animal health business by selling it to Eli Lilly.

Bayer also contributed to the consolidation in the OTC market - by announcing the $14.2 billion acquisition of Merck Consumer Care.

Chemicals

Top deals in HY1 2014 were strategic in nature as chemical companies continue to position themselves in an increasingly competitive global marketplace. Portfolio rationalization continued apace as companies exited lower-margin non-core businesses. Specialization and geographical expansion were the key deal drivers behind the global top 10 completed deals in HY1 2014.

For instance, by acquiring the leading high-tech materials supplier, AZ Electronic Materials, with an extensive operational footprint in Asia, Merck has strengthened its position as a premium segment solutions provider for the global electronics market.

As part of its acquisition of Clariant's Leather Services Business, Stahl has taken over all the relevant activities including production sites in Germany, Italy and India and laboratories in several countries, expanding market and product coverage. Not unsurprisingly, the US shale gas boom and the resulting decrease in energy prices remains an important factor for US related deal activity.

KPMG's Deal Thermometer indicates a 'Hot' environment in pharmaceuticals and 'Moderate to Hot' environment in chemicals for 2014's second quarter M&A activity. Pharmaceutical and chemical companies have increased their appetite for deals in the last twelve months, reflected by increasing forward P/E Ratios. At the same time, Net Debt/EBITDA multiples are projected to decrease in the year to 30 June 2015, giving them more deal capacity.