M&A tops $2.2 trillion in first yearly rise since 2007
According to a just released Thomson Reuters report, it appears that the global M&A cycle may be back on an upward trajectory, after plummeting in 2008-9. According to the report, “that means 2011 could be the second of several years of rising deals — earlier this year Citi analysts said the world was “in the foothills” of a new M&A cycle. These cycles typically last years: the last peaks came in 2000 and 2007.”
While the companies we serve operate at the lower end of the Middle Market, and smaller companies are not called out in this report tallying the world’s mega-deals, there is a clear connection between M&A activity among the largest and smaller companies. While the particulars vary, the main drivers of deal activity are the same:
- Economic performance improving – companies’ revenue and earnings improving. Public companies have shown overall consistent improvement. Quality private companies that have survived and gotten their financial house in order should now be able to demonstrate at least several months or a year of strengthened profits, which increases their appeal to buyers.
- Pent up demand – depressed market has suppressed normal amount of activity driven by companies’ strategic needs to acquire, consolidate, divest, refinance, etc.
- Demand from emerging markets – the increasing success of developing nations provides them the financial resources and strategic rationale underlying M&A activity. This situation creates more competition to buy American companies. According to the Thomson Reuters report, “most deals from newer markets were aimed at securing resources or technologies.”
- Debt market improving – lenders are slowly – and hesitantly – making loans available again to borrowers with low credit risk, and furthermore…
- Interest rate is very low, making that debt inexpensive for those who qualify for loans
- Equity market is cash rich – corporations are holding more cash than at any time in almost a half-century, and private equity group (PEG) investors have approximately $425 B of money they have raised on behalf of other investors to buy and build up companies. All this money needs to be invested. Shareholders and PEGs’ investors will not be patient forever, as their money is tied up, but not working for them.
- Taxes – Today, the President will sign the bill now passed by both the Senate and the House to delay the previously legislated increases to the capital gains and ordinary income tax rates for two years (those are the rates that most directly affect sellers of stock or entire companies). Notwithstanding the inevitable political fracas that will ensue during the 2012 election year and sew more economic uncertainty, the M&A market will assume that income taxes will probably rise on January 1, 2013. This new deadline will drive deal activity to be completed prior to this date. Start your engines!
While these factors drive the overall market, M&A demand for specific industries and companies within them is influenced by myriad other factors. That topic will be discussed in other posts.