Despite record levels of activity, the current M&A market is still quite a bumpy ride for many. In 2015, deal value reached $2.3 trillion and 9,962 deals were announced in the U.S. Compared to 2014 numbers, we saw a very significant increase in deal value, while the number of deals was relatively flat (-1.6 percent). This is because the average deal size grew 67 percent in 2015 — from $141 million to $235 million.
Big Brand Name Acquisitions
One of the reasons for this enormous increase in deal value was that transactions by big brand names came back in vogue. Think about Marriott buying Starwood Hotels for $12.2 billion, creating the largest hotel company in the world. The number of megadeals — deals valued at more than $10 billion — increased by nearly 130 percent while deals over $5 billion and $10 billion increased by 24 percent. A few very large deals were enough in themselves to drive up the total value of M&A activity.
Great Risk, Great Reward
Another factor that contributed to these record-level M&A numbers was an increase in valuations. Buyers were simply willing to pay more for companies. We had a certain amount of “chasing yield” where companies with cash sitting on their balance sheets were looking for ways to deploy it. Rather than getting a third of a percentage point with financial institutions, they were willing to take some risk and get a five percent return on an investment. When you get a five percent return you are willing to pay a 20 X multiple. That’s how we saw some of those deal values go up, especially in the real estate industry (with some REITs) and also in the pharmaceutical space.
Private Equity Activity Still Modest
Taking a look at private equity, the activity is still modest. The market remains one where strategic buyers have an advantage over financial buyers. Part of the reason is that strategic buyers are more motivated and tend to have more cash. Many are faced with stagnant organic growth prospects, which drives them to execute acquisitions to spur growth. In addition, since strategic buyers typically hold on to their acquisitions long-term, they tend to expect higher returns from a deal and can therefore bring a better value proposition to the table than private equity. However, we expect private equity will be back soon, even if they were not quite as vigorous in 2015.
Concern over Interest Rates
Historically the fourth quarter is very busy for private equity because they want to book investments before year-end. In 2015 we saw a flurry of activity in the third quarter that is usually reserved for the fourth quarter, as people accelerated to close deals earlier. A driver for this was concern over what would happen with the Fed raising interest rates.