Posted on: January 24th, 2014
Global M&A activity was lackluster in 2013 decreasing 20% from 2012’s level. M&A volume has been four flat years in a row, despite record level of cash on corporate balance sheets and at private equity funds. Every year it seems this cash dry powder is a much discussed factor presaging a run up M&A activity. Yet, the market continues to ebb and flow, in fits and starts, seemingly unaffected by the sheer magnitude of this capital overhang. So why should it M&A activity in 2014 be any different? We daresay this year will be different for reasons having to do with macroeconomic factors in the US.
2013 was a great year in the stock market with the all major indices recording strong gains. While corporate operating fundamentals were relatively constant in 2013 over 2012, the market gains seem a function of risk seeking behavior of market participants with few worthwhile investments options. It is as if investors finally capitulated and said, ” I cannot sit in cash any longer, I might as well go into the stock market” This increase in stock prices creates the need for corporate America to grow at a faster rate to justify its suddenly higher P/E multiple.
This creates a need to create faster growth in a world of tepid organic growth. The only way this is possible is through M&A activity. Companies need to focus on executing mergers and acquisitions that will add to top line revenue and bottom line earnings in an assertive way. Given that we are now in the fifth year of an economic expansion, with high financial asset prices and low risk premia in the market, the factors may be aligning for a lift off in M&A activity in 2014.