The M&A acceleration: What it means for investors
Strong equity market performance and a deepening recovery bode well for continued high deal volume
May 06, 2014 | Our Perspectives Archive
Global Head of Equity Strategy, J.P. Morgan Private Bank
The year thus far has seen strong merger and acquisition activity, which Steven Rees, Global Head of Equity Strategy for J.P. Morgan Private Bank, calls “a significant vote of confidence in the economic outlook from corporate America.”
"After all,” says Mr. Rees, “deals typically don’t get done unless acquirers are feeling confident about the outlook. We believe the recent pickup in deal activity is indicative of stronger business trends at home.”
Volume has almost doubled globally, up 87% versus the same period last year, to more than $2.4 trillion of announced deals involving over 13,000 companies, according to Bloomberg data (as of 8/1/14). In North America, deal volume is up 96% year-over-year for the same period.
Healthcare leading in activity
Deal activity has been concentrated in the healthcare sector, where synergies are easily realized, but should flow to other sectors, such as technology, media and energy. Healthcare companies seek new acquisitions to gain access to drugs, improve their global reach and access fresh markets, or to simply increase in size. In fact, according to Bloomberg, the top five healthcare companies today are the combined product of a merger of more than 40 companies.
The rapid pace of corporate activity in healthcare appears set to continue: These companies have amassed large amounts of cash waiting to be deployed, and the field of acquirers has expanded, with medium-sized healthcare companies as well as biotech firms actively entering the market.
Shareholder activists are taking notice
Shareholder activism is now playing a larger role in M&A deals. Corporate boards have noticed that the markets are rewarding the companies involved in the deals that improve growth and enhance shareholder returns. While historically it was largely only acquisition targets that traded up once a deal was announced, more recently acquirers have also started trading up.
A synergistic relationship
Overall, a jump in M&A activity is good for equities, notes Mr. Rees. “M&A activity tends to be positively correlated to GDP growth in the United States as well as equity market performance. Better growth, we think, means better returns for owning equities.”
The companies that do deals can realize cost and revenue synergies, which in turn can potentially boost margins and returns. An active M&A environment also tends to lead to higher equity market multiples for companies, which can translate into a bigger premium for the market as a whole over time.
Our view is that the U.S. recovery will deepen over the second half of this year. That, combined with strong recent equity market performance, bodes well for continued acceleration of deal activity during the second half of this year and into 2015.
We invite you to contact us to learn more, and a J.P. Morgan representative will be in touch with you.