The mergers and acquisitions business picked up a lot of momentum around the world at the beginning of 2018. Some well-known names including Dr. Pepper/Keurig Green Mountain, Bioverativ/Sanofi have already popped up, albeit no German addresses. The volume of M&A deals that have been announced increased in the first few days of trading of the year to USD 320 bn spread over more than 2,000 transactions. This represents an increase of easily 50% on the year-earlier period. Overall, the data provider Bloomberg registered just short of 30,000 M&A transactions world-wide last year. The business was driven mainly by overseas deals, with around 50% of the total transaction volume handled in North America.
We expect that this trend in the M&A business will continue this year. The following reasons suggest this:
- After an upswing that has lasted 8 ½ years many companies have now grown so strongly in their business sectors and local markets that they are now looking for new growth areas. Many companies are also urgently seeking new technologies to invest in because of the – in some cases dramatic – changes in the business environment.
- The companies’ holdings of cash and cash equivalents are greater than they have been for many years. Due to the unfavourable interest rate environment these do not offer adequate interest income.
- The US tax reform is creating a boom: there are many companies that will earn more thanks to falling tax rates, and thanks to reduced capital repatriation rates some US companies are in a position to use foreign bank balances for M&A transactions.
- Low capital market rates provide good refinancing conditions for takeover loans.
- The high equity market valuation of many buyer companies allows them to pay higher purchase premiums when they use their own shares as currency to buy a target company with a lower valuation.
- The positive outlook for the future performance of corporate profits and the equity markets as well as the good stock market sentiment remain intact. This is especially important with regard to the market’s ability to absorb possible capital increases.
- Balance-sheet ratios are very solid. Germany’s HDAX companies, for example, have more equity than ever.
In Germany, too, the level of M&A activities should increase again this year. In the past few years there has been far less activity here than in the other large industrialised countries. The last big takeovers in Germany were those of Stada and Uniper (both in 2017).
On the risk side, a steep increase in equity market volatility and strongly rising (corporate) bond yields could have a negative impact on a revival in the M&A market. But there is no sign of such developments at the moment. It is, therefore, to be expected that the rapid pace of activity in the M&A business will initially be sustained.