Forecast for M&A in 2014 looks bright

December 5, 2013 07:48 AM

A revival in M&A activity has been much anticipated and discussed almost since the start of the global financial crisis five years ago. With few exceptions, boosts in deal making have proven unsustainable.

Things may be changing, and for the better. Confidence is returning, and there are indications that 2014 will continue the strong deal volumes we’ve seen over the last couple of quarters. When we polled 2,400 M&A professionals, 67% of buy-side and 75% of sell-side respondents reported expecting overall M&A deal volumes to increase over the next 12 months.

Several factors are propelling deal activity. First, many firms have increasingly healthy balance sheets. For instance, according to a recent article in the Financial Times, the 100 largest companies listed on the London Stock Exchange have increased their gross cash on balance sheet by more than 30% since the global financial crisis began. Second, there are signs that the financial climate is improving. As has been the case for some time now, larger, more credit-worthy companies are able to take advantage of historically low interest rates, and may be more inclined to embark on debt-financing deals as a result. Even companies with previously limited access to capital markets are finding it easier to take advantage of relatively cheap funding as investors hunt for yield. The value of acquisition-related high yield finance so far this year has reached its highest level in six years. However, for firms not already well-positioned financially and yet solely reliant on bank lending, access to funding remains challenging. Third, a global economic recovery looks to be underway, with the U.S. leading among the advanced economies, and the Eurozone also expected to resume modest growth after the contractions in output seen in 2012 and early 2013. As the U.S. is the largest single target market, and Europe the largest global region, in terms of M&A, this recovery bodes well for increased levels of deal activity.

Another factor spurring deal activity is timing related to the aforementioned point around access to financing. Deal-makers in the U.S. (and as a pile-on effect, elsewhere globally) are attempting to take advantage of the record low interest rate environment before any tapering of the quantitative easing program by the U.S. Federal Reserve, which could see it begin to wind down its $85 billion-a-month bond buying habit, which has been used to prop up the U.S. economy as well as bolster the global outlook.

The positive momentum was evidenced by the spate of blockbuster transactions announced in Q3. Most notable was the Verizon Communications announcement to purchase the remaining 45% stake in Verizon Wireless from Vodafone. Such deals, while not necessarily indicative of the overall appetite or feasibility of M&A at large, may have a ripple effect in the market, encouraging other corporates to embark on similarly ambitious transactions. At a minimum, they encourage confidence in the market for dealmakers.

Private equity has also begun to make a comeback – or, at least, is no longer on the decline. Although buyout activity remains somewhat stagnant, exit activity increased for the first time in several years during the third quarter. Secondary buyouts continued to feature among the biggest deals. The volume of portfolio asset sales from one PE firm to another has been a persistent trend and is likely to continue into 2014.

Overall, the outlook for M&A is an increasingly positive one. There has been an acceleration in global deal activity so far in 2013, with many positive indicators such as larger average deal values and more big-ticket deals in key markets such as Europe. With the exception of the U.S. government shutdown and debt ceiling political jockeying, there have been few events to shake the confidence of investors, who are broadly optimistic about their prospects in 2014. Across a range of industries and geographies, firms are turning to deal-making to stay competitive and to take advantage of an improving economic climate.

A revival in M&A activity has been much anticipated and discussed almost since the start of the global financial crisis five years ago. With few exceptions, boosts in deal making have proven unsustainable.

Things may be changing, and for the better.  Confidence is returning, and there are indications that 2014 will continue the strong deal volumes we’ve seen over the last couple of quarters. When we polled 2,400 M&A professionals, 67% of buy-side and 75% of sell-side respondents reported expecting overall M&A deal volumes to increase over the next 12 months.

Several factors are propelling deal activity. First, many firms have increasingly healthy balance sheets. For instance, according to a recent article in the Financial Times, the 100 largest companies listed on the London Stock Exchange have increased their gross cash on balance sheet by more than 30% since the global financial crisis began. Second, there are signs that the financial climate is improving. As has been the case for some time now, larger, more credit-worthy companies are able to take advantage of historically low interest rates, and may be more inclined to embark on debt-financing deals as a result. Even companies with previously limited access to capital markets are finding it easier to take advantage of relatively cheap funding as investors hunt for yield. The value of acquisition-related high yield finance so far this year has reached its highest level in six years. However, for firms not already well-positioned financially and yet solely reliant on bank lending, access to funding remains challenging. Third, a global economic recovery looks to be underway, with the U.S. leading among the advanced economies, and the Eurozone also expected to resume modest growth after the contractions in output seen in 2012 and early 2013. As the U.S. is the largest single target market, and Europe the largest global region, in terms of M&A, this recovery bodes well for increased levels of deal activity.

Another factor spurring deal activity is timing related to the aforementioned point around access to financing.  Deal-makers in the U.S. (and as a pile-on effect, elsewhere globally) are attempting to take advantage of the record low interest rate environment before any tapering of the quantitative easing program  by the U.S. Federal Reserve, which could see it begin to wind down its $85 billion-a-month bond buying habit, which has been used to prop up the U.S. economy as well as bolster the global outlook.

The positive momentum was evidenced by the spate of blockbuster transactions announced in Q3. Most notable was the Verizon Communications announcement to purchase the remaining 45% stake in Verizon Wireless from Vodafone. Such deals, while not necessarily indicative of the overall appetite or feasibility of M&A at large, may have a ripple effect in the market, encouraging other corporates to embark on similarly ambitious transactions.  At a minimum, they encourage confidence in the market for dealmakers.

Private equity has also begun to make a comeback – or, at least, is no longer on the decline. Although buyout activity remains somewhat stagnant, exit activity increased for the first time in several years during the third quarter. Secondary buyouts continued to feature among the biggest deals. The volume of portfolio asset sales from one PE firm to another has been a persistent trend and is likely to continue into 2014.

Overall, the outlook for M&A is an increasingly positive one. There has been an acceleration in global deal activity so far in 2013, with many positive indicators such as larger average deal values and more big-ticket deals in key markets such as Europe. With the exception of the U.S. government shutdown and debt ceiling political jockeying, there have been few events to shake the confidence of investors, who are broadly optimistic about their prospects in 2014. Across a range of industries and geographies, firms are turning to deal-making to stay competitive and to take advantage of an improving economic climate.

About the Author

Matt Porzio is vice president of strategy & product marketing at Intralinks.