Tuesday, July 1, 2014

Reasons for the spike in M&A activity

As predicted back in April (see post), US M&A activity accelerated in Q2, resulting in the most active first half since 2007.
WSJ: - Indeed, there have been 20 merger deals valued at more than $10 billion this year, the biggest total for the period since the first half of 2007, according to Dealogic. Most bankers, whose near-term views of the market are informed by the pipeline of unannounced deals they are working on, are optimistic the second half will be strong too. Many cite the possibility the big-deal boom—which has been largely confined to the telecommunications, media and technology and health-care sectors—will broaden.
Reasons for the spike vary from low financing rates and easy access to debt capital markets to strong equity prices, with shares used as acquisition "currency". Limitations to internal costs cutting also drove companies to consolidate externally.
WSJ: - There are a number of currents driving the increase in deal activity, bankers say. Among them: low interest rates, which make it relatively easy to borrow cash for acquisitions; lofty stock prices, which give companies a strong currency to pay for deals; and encouragement from shareholders, who have been lately bidding up the stock prices of companies that have made takeover bids. What is more, companies did a lot of internal restructuring during the M&A lull—building up big cash piles in the process—and there is less of that to do now, bankers say. That means that, in many cases, companies must search externally for cost-cutting opportunities, like acquisitions of rivals with overlapping operations that can be shed

Source: MergerMarket

The greatest reason for increased M&A activity however has been the decline in uncertainty (see chart). While many economists, bloggers and the media continue to ignore this factor, policy uncertainty - more than any specific policy - has been the key drag on economic activity in general and deal making in particular.
WSJ: - ... unlike in recent years, when a seemingly endless parade of ... concerns presented themselves, starting with the financial-markets meltdown and leading up to the European debt crisis and budget battles in Washington. At least for now, such impediments to deal making are largely dormant, they say.

Gregg Lemkau, the co-head of global M&A at Goldman Sachs said that, in recent years, when he would pitch possible deals to clients, they would often say: "Good idea—come back in six months and we'll discuss it."

"There was always some looming event, real or contrived, that companies wanted to wait to get past," added Mr. Lemkau. Now, he said, "There's no obvious macroeconomic event out there that people are waiting to get beyond."


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