There was a significant amount of merger and acquisition activity in 2014, the most since the economic downturn began in 2008. The trend does not appear to be slowing. According to Thomson Reuters’ Merger & Acquisitions Review, the number of announced deals in the U.S. for the first quarter of 2015 increased 31 percent over Q1 2014. And M&A activity is expected to remain strong for private and public companies for the remainder of 2015.
What are some of the reasons for the rise in M&A activity?
Companies have built up significant cash reserves.
The options for what can be done with this capital are limited, so many companies look to acquisitions as a way to grow and increase value for their owners. Companies look for acquisitions to expand their geographical footprint, diversify and expand their product offerings, or vertically integrate their businesses.
Capital is more widely available now than it was a few years ago.
Companies that do not have significant cash reserves can still get access to capital. The current cost of capital is historically cheap for debt issuance or loans. Because of the availability of capital, more companies and private equity firms are active in the market.
The U.S. dollar has strengthened.
The strengthening U.S. dollar, an increasing U.S. stock market, and declining foreign markets all make foreign acquisitions more attractive. For U.S. companies looking to expand into foreign markets, now is a good time to make the move.
Companies and private equity firms are taking advantage of higher multiples to divest or reallocate investments.
Price multiples have increased, thanks to the increased cash reserves and more widely available capital. Some companies are selling non-core assets to generate capital and then reinvest it in the core strategies of their business. Private equity firms are reevaluating their investments – some of which they held longer than expected due to the economic downturn – and selling now because of the price increases.
Some company owners are at or near retirement age.
Baby Boomers own a significant portion of private businesses in the U.S. As they approach retirement, more and more of these companies are coming on to the market, particularly if there is no succession plan in place to turn the business over to the next generation. This is an interesting time for younger private business owners and private equity firms, as there may be an opportunity to buy a company or a portion of a company that traditionally would not have come up for sale.
Mergers and acquisitions are not easy; many transactions do not turn out as well as expected. As a buyer, it is critical to perform adequate due diligence and properly plan how to implement the deal. As a seller, make sure it is the best solution for the business. Having a strong team of internal and external advisors can help make the transaction a success.
Mark A. Guillaume can be reached at Email or 215.441.4600.
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