Monday, September 8, 2014

Mergers and Acquisitions: Market Update First Half of 2014

Our acquisition finance course this October in Amsterdam features a detailed look at the current European merger market.  Today's post contains some hightlights from the first half of 2014.

The global M&A market finally recovered from the crisis. M&A is at a 7 year high of $1.7T for the first half up from just over $1T for the same period last year. The U.S. represents about 40% of the total and is somewhat more active than Europe. This probably represents the stronger U.S. economic and stock market recovery compared to Europe. Interestingly, private equity related transactions represent only about 7% of the market compared to an average of 15%, and down from the pre-crisis 25% high. The reason for this, despite high levels of dry powder and substantial new fund raising, is the return of the corporate strategic acquirer (CSA). CSA have “crowed-out” private equity and offered record prices for large transactions. U.S. PPX are at recorded level levels of 15X+ compared to the pre-crisis of 12X and the post crisis low of just 6X. The number of deals greater than $10B for the half was 19 compared to 9 last year for the half.

The drivers underlying the return of CSA are as follows:

1)     Excess Cash: firms have large and increasing cash balances with limited deployment opportunities. Stock repurchases are difficult to justify given the 35%+ increase in the S&P over the past year.
2)     Rates: low rates and spreads translate into enhanced debt capacity and “cheap” funding.
3)     Pent-up demand (AKA mean reversion): the immediate post crisis blues appears to have past. Firms are returning to targets that had been tabled by the crisis.
4)     Positive Market Responses: ordinarily the stock market reacts negatively toward the buyer when an acquisition is announced - with average drops of 2-3%+. The current market reaction to announcements has, however, been positive with increases of 3%+ upon announcement. This reflects that the deals have strong strategic rationales - as is usually the case early in the M&A cycle.
5)     Return of Hostile Transactions: either you develop growth options or you become one. Hostiles now represent 20%+ of total M&A.
6)     Increased Confidence: rise in buyer stock prices has increased managerial confidence. Also, it provides an alternative funding currency - the buyer’s stock. The level of all cash deals has dropped to the lowest level since 2001.
Improving investor risk appetite promises to support continued robust M&A. Note the drop in CCC (lowest rated-highest risk bonds) from 3500BP in 2010 to around 600BP now which is close to the pre-crisis low of 500BP. Expect more aggressive transactions with higher debt levels as the cycle progresses. Also, expect the return of PE as the dry powder urge to buy becomes too much to resist. Of course, beware of potential geo-political risks and other black swans.


1 comment: