The last few years of global merger and acquisition activity have been, in a word, “abnormal.” The nominal amount of M&A deal volume has been abnormally depressed. As a percentage of market capitalization, the value of M&A transactions has been abnormally low. Corporate balance sheets, meanwhile, have abnormally low levels of debt. All of which has created, according to Credit Suisse’s Global Equity Strategy team, an exceptionally good opportunity for companies to boost their earnings by joining forces with or buying other companies. As an added bonus, acquirers might find themselves in the relatively unusual position of seeing an immediate positive market reaction when they announce a deal.
In a report published last week, “M&A: Welcome to the Recovery,” the strategists note that pursuing either share buybacks or cash-financed M&A could enhance earnings per share for nearly half of all European companies and almost a quarter of American ones. Though most corporate buying activity of late has been in the form of share buybacks, Credit Suisse notes that companies tend to step up their M&A activity as the stock market rises – and the S&P soared 32 percent last year. The collective balance sheet is certainly ready to be put to use: 73 percent of U.S. companies and 56 percent of European ones have an astonishingly low level of debt on their balance sheets compared to their total market capitalization. Even if companies in both regions borrowed only enough to return to historic average leverage levels, they would have a remarkable $2.3 trillion of “firepower” available for corporate M&A activity. Private equity companies have another $1.1 trillion on hand. Finally, surveys show that corporate confidence is improving in both the U.S. and Europe, another factor that tends to signal an upswing in M&A.
All that said, corporate cash levels have been rising and debt levels falling since 2008. And yet M&A activity levels have not responded accordingly. The value of global M&A transactions in 2013 was $2.91 trillion, a seemingly healthy 9 percent increase over 2012, according to Dealogic. But that’s still nearly 8 percent lower than 2008 totals. What’s more, the number of deals in 2013 was 37,212, down 15 percent from 2012.
But the last few months have been particularly busy, at least when compared to recent history. From the beginning of December, no fewer than nine deals valued at more than $1 billion each have been announced. Google, for example, raised eyebrows when it announced last month that it would acquire Nest Labs, a company that creates “smart” thermostats and smoke detectors, for $3.2 billion. In each of the nine cases, the acquirer’s stock jumped by more than 5 percent the day of the announcement, with the average increase being what the analysts dubbed a “staggering” 17 percent.
Credit Suisse thinks M&A volumes should continue to accelerate. But in another report released last week, “M&A: Acceleration and Implications,” they point out that not all industry groups and sectors will necessarily catch the M&A bug.
Dollar stores and food retailers – both highly competitive businesses – could realize significant synergies by consolidating, says analyst Edward Kelly, who covers dollars stores and food and drug retailers. Overcapacity, says small-cap bank analyst Matthew Clark, could well spur forward smaller institutions eager to build scale, such as BankUnited Inc., to potentially eye banks or thrifts in the New York metropolitan area, and Hancock Holding Co., to potentially consider banks in northern Florida and Houston. Given the United States’ boom in shale oil and gas production, the energy market has seen surprisingly light volumes of M&A activity, but Co-Head of Global Oil and Gas Equity Research Ed Westlake suggests that Asian strategic buyers may take a look at shale gas reserves in North America.
Semiconductor companies with businesses tilted in favor of consumer electronics—where unit and revenue growth have fallen or disappeared entirely—seem likely candidates for using acquisitions as a way to diversify. Semiconductor analyst John Pitzer, who also heads Credit Suisse’s technology sector research, suggests that companies such as Broadcom, Texas Instruments and Maxim Integrated Products may be inclined to seek opportunities to expand into industrial markets by buying or merging with companies that are already strong in those areas. As the shift toward cloud computing continues to gather steam, so too should consolidation in the space—witness Oracle’s $1.5 billion purchase of Responsys in December. That transaction “could signal the start of a larger M&A cycle” among cloud-focused companies, suggests small- and mid-cap software analyst Michael Nemeroff.
If there’s a single transaction that’s been buzzing in the New Year, it’s press reports of a potential tie-up between Sprint and T-Mobile. And while such a deal has the potential to provide $4.5 billion of operating synergies, says telecommunications analyst Joseph Mastrogiovanni, he also warns that it remains “fraught with obstacles,” not least of which would be the approval of both antitrust and telecommunications regulators. Sprint’s interest in buying T-Mobile also risks attracting possible rivals, including DISH.
The analysts also point out a handful of industries that don’t seem ripe for a pickup in M&A activity. The metals and mining industry, says Credit Suisse, will probably see a decrease in M&A volumes this year, since “without the tailwind of an appreciating commodities price environment, it is a lot harder to construct value-accretive deals.” Casual dining chains aren’t likely candidates for consolidation either, suggests restaurants analyst Karen Holthouse, as “high multiples [have made] public targets somewhat unattractive.” What’s more, a handful of the most active acquirers, including Starbucks and Darden Restaurants, Inc., have declared publicly that they’re not in the market for more properties.
Even those not in a position to benefit from their own M&A opportunities stand to reap rewards from a recovery of deal activity. Call it a virtuous circle: As noted above, strong stock markets tend to prompt M&A. And in return, M&A tends to prompt strong stock markets. Historically, the Standard & Poor’s 500 Index has climbed 9 percent in the six months following a trough in M&A activity, the analysts say in their M&A overview. While the prospect of a single-digit increase won’t necessarily impress in light of the S&P 500’s double-digit returns last year, it isn’t so shabby for a bull market that is starting to get long in the tooth.
Google’s acquisition of Nest Labs for $3.2 billion attracted a great deal of attention in January. Above, the Nest smoke and carbon monoxide alarm is shown at the company’s offices, in Palo Alto, Calif. Photo courtesy of AP Images/Marcio Jose Sanchez