CORPORATE BANKING: The momentum of M&A in 2014

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12/29/2014 | 05:16 pm
The global market of mergers and acquisitions came roaring back this year, hitting a new 7 years record in terms of value.
The total amount of mergers and acquisitions transactions (M&A) stood at 3.270 billion dollars in December 2014, up 40% compared to the same period in 2013. That year, the market was characterized by a 5.9% decline of the transactions value, announced at 2.393 billion dollars, after a stability in 2011 and 2012. The total amount of mergers and acquisitions has surged this year, reaching its highest level since 2007, where it peaked at 4.120 billion, boosted by the leveraged buyouts boom.

Several factors behind this momentum:
Firstly, increasing competition and the perpetual pursuit of leadership push the actors in a given sector to follow the example of their competitors when they realize a large-scale 'deal'.
Moreover, the search for external growth in order to escape the weakness of local economies lead some to approach other companies in order to benefit from the dynamism of foreign markets such as the United States.
Capacity maneuvers found back by companies are another factor in favor of mergers and acquisitions. Interest rates are low since the 2008 crisis. Companies have the capacity today to launch operations, after having issued many bonds and secured their balance sheets. Indeed, according to Credit-Suisse, nearly three-quarters of American corporations and more than half of Europeans "displays an abnormally low net debt". The gap between these levels and the historical average of the last 20 years provides US and European companies an additional financial strike power of 2,300 billion dollars.
Finally, analysts claim that the M&A market follows the evolution of the stock market, with a one year lag in general. The good performance of the equity markets in 2013 and this year has supported the flowering of operations. In fact, recovery periods are the most conducive to rapprochements, because even if valuations are less attractive than at the bottom of the cycle, the situation is less uncertain and confidence of CEOs and shareholders peaks. On the other hand, companies also need to have themselves a high valuation if the payment is made by shares. The current valuation levels are able to satisfy both buyers and sellers.

Sectorial analysis:
Telecom (AT&T-DirecTV / $ 67 billion), health (Valeant-Allergan / $ 66 billion), energy (Halliburton-Baker Hughes / $ 35 billion) appear at the top of the industries in which the 'deals' showed the strongest momentum this year. Analysts believe that the dynamism of mergers and acquisitions in those sectors is likely to persevere in 2015.

The following chart compares the evolution of the world stock index “Bloomberg World Exchange’’ (white), with the total value of mergers and acquisitions on a global scale (yellow):

We can observe the covariance of these two components: the value of M&A follows the evolution of the stock market. Currently, equities are part of an upward trend, mergers and acquisitions should therefore pursue their growth in order to reach new records in the upcoming years.

Anas Boumedian
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