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Why This M&A Boom Is Different

Merger and acquisition activity in 2014 was reminiscent of 2008, but theres reason to believe this boom is more sustainable for the long run.

By Tom McGee | Updated on January 05, 2015
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.

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