The value of merger and acquisition (M&A) transactions worldwide reached an estimated US$1.8 trillion in the first half of 2014. Deloitte’s “M&A Trends Report 2014” found that experts expect deal activity to sustain or increase that momentum through 2016. The last time M&A activity peaked, it ran straight into the 2008 economic crisis. Now that it’s peaking again, are we watching a rerun? Or something more sustainable?
Without question, people feel there’s money to be made. And this time, it may remain that way for a period of time. There are three key differences between the run-up of 2007 and the run-up of 2014: the way participants share risk, the sophistication of financial due diligence, and the surrounding macro conditions. Taken together—and absent a significant geopolitical event that disrupts world markets—these factors suggest that today’s M&A boom may be more sustainable than its predecessor.
In It Together
Some M&A transactions rely entirely on stock. Others are purely cash-based. Either way, there’s an imbalance in implied risk, which can inhibit the parties’ commitment to generating value. The structural benefit of a mixed cash-and-stock deal is that it balances the load: Buyers and sellers share in both the risk and the incentives to make the deal work.
Today stocks are trading at near-record highs and debt financing is both available and cheap. That gives companies flexibility in managing their capital structures, as well as in meeting a seller’s specific interests when doing deals that have not always been available to them. And indeed, recent trends show the market moving away from all-cash deals. They represented half of all acquisitions by publicly listed buyers in the five years through 2013, according to Bloomberg. In the second quarter of 2013, they made up two-thirds of the takeovers. But a year later, the all-cash share of the M&A picture was down to one-third.
The Value of Analytics
If a buyer overpays for a company—or fails to make the right strategic fit—then the effort to generate synergy starts out with a strike against it. That’s why a new standard in financial and commercial due diligence is another strong signal that this M&A boom is on a sounder footing than the last one.
Some deals have the potential to improve current operations. Others promise a deeper transformation in the acquirer’s growth prospects. As a 2011 Harvard Business Review analysis noted, deals fall short of expectations when people apply the wrong expectations to them from the outset. They may set the wrong price, or they may misalign the integration process.
The antidote to these pitfalls is analytics. And compared with 2007, analytics systems have made two great strides forward in M&A: They’re both more capable and more widely embraced. There’s no question that analytics technology has become easier and less costly to use. And the Deloitte M&A trends report found that 58 percent of corporate dealmakers today, and almost 70 percent of private equity leaders, apply data analytics to their targeting and due diligence processes.
A Wider View
In 2007, the macroeconomic environment for M&A (and everything else) was on the brink, although that wasn’t clear at the time. Whatever the global economy may bring next, the difference as we enter 2015 is that people are more attuned to the external environment. While uncertainty and related anxieties continue to exist, business leaders are more accustomed to managing against that backdrop.
Chastened by the last downturn and armed with tools for better visibility, dealmakers are more likely to include big-picture externalities as part of their M&A planning. Even without macro business cycles, acquirers have a broader set of inputs to consider than they had in the past. The nature of growth is different today. All big companies are globally connected, and anyone whose fortunes depend on the geopolitical situation must remain aware of its rapid changes.
Proof in the Prices
Is the current M&A activity healthier than that of six years ago? Share price movement seems to indicate it is. Over the past 20 years, most companies have seen their share prices decline when an acquisition was announced. In 2014, the same news led to an average one-day increase of 4.4 percent—the greatest post-announcement increase since Dealogic began tracking the statistic in 1995. The confidence that is causing this effect may arise from a variety of factors, but it’s clearly there.
For companies that are contemplating a return to M&A after a number of comparatively dormant years, comparisons to the 2007 boom may bring pause. However, the fact that people are raising the comparison is a reason to feel more confident; insufficient reflection was part of the problem last time.
That doesn’t mean companies have a blanket green light to engage in mergers and acquisitions. Caution is still imperative. Heavier M&A volumes mean other companies have found deals that they believe meet today’s more stringent criteria—not that your proposed deal will. Today’s deal makers start with an advantage, though. They have more analytics horsepower at their disposal. They’ve learned to use risk arbitrage to keep both sides of a deal committed to its success. And they’ve lived through enough recent history to know they don’t want to repeat it.
Tom McGee is deputy chief executive officer and national managing partner of M&A services for Deloitte LLP.
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