In 2007, the collective value of mergers and acquisitions (M&As) across the globe stood at $4.61 trillion, a new annual record. The Great Recession put a swift end to that trend as companies focused more on survival than growth.
M&As bottomed out at $2.30 trillion in 2009, and stayed relatively steady in the $2.6 trillion to $2.8 trillion stage through 2013. As the economy began to recover, total M&A value leaped to $3.66 trillion in 2014 and last year topped $5 trillion for the first time, officially making 2015 the greatest year in M&A history.
PricewaterhouseCoopers said that a whopping 54% of CEOs in the U.S. had intended to complete an acquisition during 2015. In the first half of the calendar year alone, 4,654 M&A deals were executed.
What is driving M&A mania? A primary reason is growth concerns. Stocks are somewhat overvalued and suffering from even higher expectations. The only way for some companies to maintain growth rates sufficient enough to meet expectations is through strategic acquisitions.
Other significant factors include readily available cash and unusually low interest rates. During the Great Recession, companies stayed relatively lean and gathered the cash buffers necessary to weather economic storms. With interest rates near zero and slowing demand that did not require expansion of facilities, what were companies to do with their cash reserves? Some sat on them, others initiated stock buybacks to keep the price high, and still, others used their cash to focus on strategic acquisitions.
Low interest rates also facilitate M&As through low borrowing costs. It is easier to pull off a large merger when it can be financed at reasonable rates — and they do not get more reasonable than today's values.
Tax considerations can also play a role, as with the recently announced merger between Pfizer and Allergan. The massive $160 billion deal will result in the relocation of Pfizer's headquarters to Ireland, saving massive amounts of money in U.S. taxes. Politicians bluster about the issue, but have not yet taken legislative action.
This wave of mergers differs a bit from past mergers in that fewer conglomerates are being formed. Instead of buying companies in diverse fields to spread out the risk of a downturn in one particular area, M&As are now focused on companies in similar fields to gain market share or to acquire complementary products and territories. Healthcare has seen a significant rise in mergers as profits are squeezed by the Affordable Care Act and regulatory limitations, and pharmaceutical companies are reaching the "eat or be eaten" stage.
Should it come to pass, the Pfizer-Allergan deal will be the largest of the year, topping Anheuser-Busch InBev's offer to buy SABMiller for $105.6 billion. Other notable M&As include the Time Warner Cable-Charter deal worth $55 billion, the Heinz-Kraft merger at almost $50 billion, and Avago Technologies-Broadcom worth $37 billion.
Are all of these mergers a good thing? Consolidation can lead to a rise in process and limited market choice within certain fields, but it does not necessarily have to end up that way. The more strategic emphasis of today's mergers and the lower debt burdens due to cash reserves and lower interest rates would seem to give them a greater chance to succeed.
However, below the boardroom level, consolidation almost certainly means increases in efficiency through cutting redundancies and therefore jobs. Very rarely is an M&A so complementary that facilities are not closed and jobs not sacrificed.
M&A activity goes in cycles, and we may well be near the peak of this one, but do not count on the merger mania fading away completely anytime soon — especially while interest rates stay low.