When will this merger wave end?
The hottest topic in M&A circles right now is when the current merger wave will end — and is it actually already in a downturn?
There are as many opinions about this as there are experts, of course. Several factors have combined to make this topical. Among others, I’d like to comment on three:
- Obviously, the market turmoil of the past several months — following the subprime credit market problems that have spilled over into the global economy generally — is a major cause of any downturn. But for those awash in cash (and there is still a lot of cash in corporates and funds), this only makes targets less expensive and could accelerate a deal that had been in the planning. For some, this is a time of buying opportunity. Also, many companies have not had their shares affected much by the downturn in the markets, and therefore they could still make an offer using stock, and perhaps for a target that is cheaper than it would have been several months ago. For example, a company wanting to buy into the financial services industry would find bargains today.
- The length of the current merger wave would indicate that it needs to come to an end sometime soon — at least if we look at the longevity of the merger waves since the late 1980’s. This merger wave started in 2003. We are therefore now four years into the current merger wave. The late 1980’s and late 1990’s merger waves did not last this long before turning down.
- At some point the acquisitions made in the past four years by the private equity, venture capital and hedge funds need to be monitized. These financial investors have been driving much of the acquisition activity since 2003. These firms are not long term investors in the same sense that a corporation acquiring another company for strategic reasons probably does not plan to exit that business in five to seven years to return funds to investors. In previous merger waves (with the possible exception of the LBO activity of the late 1980’s before the junk bond markets closed with the demise of Drexel Burnham), the level of activity at the peak was driven by strategic investment — or at least the companies making the purchases thought they were making strategic investments! The financial investors will need to sell their purchases at some point — and those who made purchases in 2003 and 2004 must be looking for exits soon. As these come to market, there could be a supply / demand imbalance.
Consensus — and my own opinion — would say that the activity in the second half of 2007 will be significantly lower than the first half’s volume (this is evident already with the deal volumes announced in the summer, but the summer is typically a slow period anyway). M&A dealmakers at the leading firms confirm this privately. Backlogs remain high and their staff are still working very long hours, but the backlog is no longer growing.
But don’t forget: the downturn does not necessarily spell the end of mergers. The lowest point in the down cycle in merger activity recently (2001) was still higher than the peak of merger activity in the 1980’s merger wave. This is likely to be the case this time around, too.
Intelligent Mergers 
For short term predictors of shifts in M&A volumes, I recommend looking for the canaries in the coal mine, specifically the publicly traded M&A heavy boutiques, e.g. Lazard, to gauge when dips and pips in the market are occuring.
However there’s a larger trend in the works that I think you’ve noted – the stabilization of M&A activity on a higher-than-historical level/plateau. I read this as a structural shift based on globalization and increased efficiency/liquidity of capital markets activity.
It’s my perception that historical booms and busts in M&A have typically been driven by underlying capital markets instability which could take a year or more to work out – leading to wholesale slaughter in the ranks of M&A bankers.
More recently however, increasingly global, robust and efficient capital (and labor) markets over the past couple of decades have led to a dramatic shortening of any periods of instability, so except for a few very short blips in market activity, the beat goes on.
Remember how in 1998 everyone thought the world was coming to an end, led by the Baht devaluation, Danish mortgages, LTCM, and the Russian default? Despite the global smackdown, the world’s developed markets (most liquid/efficient) bounced back within a few months. The world’s less developed markets (least liquid/efficient) took 3-5 years to bounce back, and most are breaking new records today. If the same situation were to happen today, those markets would bounce back even quicker.
No tears for M&A bankers in a world of increasingly global and efficient markets! Despite a couple of lightweight blips on the way, they’ll only be getting richer as the world turns.
Andrew F.
Saturday, 15 September 2007