Mergers And Acquisitions At Record Pace

What Big M&A means for investors & Consumers

Mergers And Acquisitions At Record Pace
February 16, 2016

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.

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Erin | 02.16.16 @ 15:59
I don't like hearing about all of these mergers. I know they are great for the organizations themselves, but I feel it concentrates too much power in the hands of a few super corporations and doesn't give consumers much of a choice. Competition is a good thing because it makes better products all around.
Elaine | 02.16.16 @ 16:00
Mergers seem to only be good for the big business. I feel the little guys always get the short end of these things. Hope I am wrong.
irene | 02.16.16 @ 16:00
I think it'ds a little scary because what becomes of smaller companies after mergers
Nancy | 02.16.16 @ 16:01
I don't like that most mergers mean that jobs are lost. We need MORE jobs not more profit for the greedy corporations.
Sarah | 02.16.16 @ 16:02
I see the good and the bad. I just wish things were easier on the whole. why must there always be change... it's annoying and hard to keep up with at times.
Beverly | 02.16.16 @ 16:02
Interesting article. M&A's have always seemed such an opposing thing and scary for the little guy.
Heather | 02.16.16 @ 16:02
I too do not like hearing about mergers cause that usually means layoffs, loss of jobs or jobs mov8by over seas.
Carla | 02.16.16 @ 16:03
The relocation of Pfizer's headquarters to Ireland really bothers me. All that to save on US taxes making us lose jobs. It is really troublesome to see businesses moved to other countries.
Bobbie | 02.16.16 @ 16:04
Seems more like the companies are working their way into a monopoly,then have to be busted up again. How many versions of Pac Bell were there at one time? Now it's all ATT. There goes any competition to drive prices down.
Steffanie | 02.16.16 @ 16:04
Not a fan of mergers. The companies seem to be the only ones who benefit.
$commenter.renderDisplayableName() | 11.24.20 @ 09:04