There’s no denying it that M&A is on fire. Look at any financial newspaper headlines and you’ll see announced deals or merger talks. And keep in mind for all the major transactions involving publicly held companies there are many smaller, privately held transactions occurring unannounced.
We can better understand this current wave of activity and what it means for you if we review historical M&A. Of two similar spikes in M&A, in 1998-2000 and 2005-2007, the first was primarily driven by Y2K and the dot-com era (or error, depending how you look at it!). This period, though it was marked by a significant burst in activity over a short time, was really an anomaly in the marketplace. It dropped off and certainly wasn’t helped by the events of 9/11.
We can better understand today’s robust M&A market by taking a look historical mergers and acquisitions.
M&A activity slowly ramped up until we reached the second peak in 2007 when inexpensive money was readily available. If you think back to 2007, there were a lot of similarities between corporate mortgages, corporate M&A, and the residential mortgage meltdown. The following years were slow for the economy and not surprisingly for acquisitions as well. M&A has a strong correlation to the equity market, although the equity market has done fantastically well since 2009 while M&A remained relatively flat until 2014, when we saw an uptick in activity.
Now there is pent-up demand for acquisitions and we’ll likely continue to see an increase in M&A activity throughout 2015.
Here are some trends to take note of today:
1. Mega deals, transactions over $5 billion, are now back in vogue.
Comparing this year to last, you’ll notice the number of deals has remained relatively flat while the dollar value of deals has increased significantly. In the U.S. for the month of May, the number of deals actually decreased from 939 in 2014 to 903 in 2015. However, the deal value increased to $261.2 million (according to FactSet Data)
2. Banks are more aggressive about lending.
With so much cash in the market, banks are now willing to take on more risk to secure more business. Banks are competing for attention from buyers and are offering attractive loan packages. We are starting to see more covenant-light transactions.
3. Companies still have record amounts of cash on their balance sheets.
Both individual companies and private equity firms now have readily available funds that can be used to pursue acquisitions.
With these ingredients in place, the M&A market remains robust.
What This Means for You
You may think that overall M&A market trends will not impact you, but I can tell you with a high degree of certainty that they will. Every industry will be affected, one way or another, because M&A is both a reflection and a source of business sentiment, and it influences market dynamics in multiple ways. You can be a passive observer or an informed observer. Or you may even choose to be an informed participant. Regardless, I encourage you to take stock of the fact that M&A is causing changes in your industry. Deal-making may even accelerate in the next few months in industries such as telecommunications, healthcare, and oil and gas. Whether or not you choose to act, of course, is up to you.
