If there was ever a period when the financial system was overly confident, it was during the mergers and acquisition boom of 2007. The players and dealmakers managed to reach a global M&A high of $1.4 billion in that year’s first four months alone. That’s substantially more than any year before or since.
Many attribute these numbers to a shift in the way deals are getting done, especially in the way they are getting financed. In 2007, companies borrowed billions to achieve M&A objectives. Cash deals made up 76 percent of that four month period. That’s compared to current events where cash deals accounted for only 47 percent of deals, the lowest number since the turn of the century. Deals made with stock consisted of 19 percent compared to eight percent in 2007.
The number of transactions financed through a combination of stocks and cash has surged. Once a small part of the overall market, cash and stock deals constituted one third of M&A transactions in 2014. This is close to 10 higher percentage points than previous years and higher than 2007. The increase in stock use for these major transactions is generating artificially high value numbers in M&A activity. This pinnacled when Facebook took over mobile messaging group WhatsApp for an astonishing $19 billion. Paul Parker is the head of Barclays’ M&A group. He says, “I don’t see the ‘frothiness’ in the current market that 2007 had, despite the recent spate of deals. This market is characterized by large, well-capitalized companies doing large, strategic, synergistic deals for cash and stock.”
One significant difference dealmakers are attesting to that distinguishes current trends from the 2007 boom is that these deals are more measured in terms of absolute value. The last two decades has seen major booms and lesser times. Throughout, it wasn’t surprising for companies engaging in acquisitions to see share prices decline upon news of the deal. It’s only been over the last 24 months that this started to change, though only during periods of moderate activity. In 2014 though, shares prices of acquiring companies were known to gain 4.4 percent within 24 hours of an announced deal. These are the highest post-announcement increases since investment banking advisor, Dealogic, started tracking data in 1995.
Barclay head Parker is currently working on Comcast’s $45 billion merger with Time Warner Cable. Like many in the field, he is confident that while a noteworthy re-rating of stock prices and better macro economic outlook has been significant, CEO confidence has played a major part. He is wary though, adding the market “is coming back, but there is still reticence out there. The actual numbers of deals are down, even with up volumes, so the pace of calls to do deals is clearly less than it was in 2007.”
Since 1995, the mega-deal has accounted for 22 percent of all deals. Industries with large companies, like pharmaceutical and telecom, saw a flurry of consolidations as a matter of consequence. Still, some insiders think all this talk about the new boom is overplayed. One of the detractors is Bob Eatroff. He is co-head of U.S. M&A at Morgan Stanley and says, “The equity markets rose over 30 percent last year, while M&A was flat. This year’s level of M&A activity is just a reversion to the mean.” And in the end, that’s no big deal.