US M&A activity is picking up steam. Deal volume in the first quarter of this year was the highest since 2007 (in dollar terms). The total of $278bn of transactions includes high profile deals such as Time Warner, Forest Laboratories, and WhatsApp.
Moreover, M&A transaction volume growth for both large and middle market firms is poised to accelerate this year. Here are some reasons:
1. US corporations currently hold record amounts of cash (see story) and shareholders want to see action. While dividends and stock buybacks have been popular recently, many firms are looking toward growth strategies.
2. The market has recently rewarded companies that are doing deals by giving them higher valuations (Facebook was an exception), encouraging CEOs to be more aggressive with acquisitions.
3. Financing costs are still quite attractive. US high yield spreads for example hit another post-2007 low last week as fixed income investors (including “shadow” banking participants) look to buy corporate paper. This allows for more leveraged buyouts even at higher valuation multiples.Â
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| HY spread to treasuries |
4. Private equity funds, particularly some of the larger ones are having a fairly impressive start this year with their fund raising efforts (see example). The first quarter has been the strongest since 2008 according to Preqin with some $95bn raised. This capital has to go somewhere.
5. A great deal of near-term fiscal and monetary policy uncertainty has been removed from the market (see post). The macroeconomic environment in the US should support M&A activity.
6. The US stock market strength, while making target companies more expensive, is providing more buying power for strategic acquisitions. Companies will be using their (sometimes overvalued) shares as “currency” to do deals.
