Cash-rich firms buying the competition at record rate
Companies have announced US$569 billion in deals so far this year with 1,550 deals in US alone
So far, 2014 is looking like the year of the big deal. Flush with cash and high stock prices, companies are buying the competition at levels not seen since the dotcom bubble.
And with Washington providing more clarity on government spending plans, chief executives are more confident their expansion hopes will pan out - especially if the US economy keeps growing.
Many of the acquisitions involve American businesses doing the buying or getting bought by overseas rivals. Global deals are up as well.
In the past month, Comcast has offered to buy Time Warner Cable for US$45 billion. Pharmaceutical giant Actavis is buying Forest Laboratories for US$25 billion. And Facebook shocked the technology world by offering US$19 billion for tiny WhatsApp.
The deals we have seen … are the tipping point that we’ve been waiting for
Merger and acquisition executives say they have expected a pickup in deal activity for a couple of years, given the bull market and economic recovery. But what prevented the really big transactions was uncertainty about the US federal budget, its debt ceiling and the fate of President Barack Obama's health care reforms.
With those issues resolved - at least for now - the way has opened for bigger, more complex deals.
"The deals we have seen in the last couple of weeks are the tipping point that we've been waiting for," said Mark Walsh, who heads the M&A practice at Deloitte. "There's so much pent-up demand to do a deal now."
US companies announced US$336.13 billion in 1,550 deals in the first two months of this year - up 31 per cent year on year and the most since 2000 - according to Dealogic. Companies worldwide have announced US$569 billion in deals so far this year, the highest level since before the financial crisis.
While the number of deals in the US is down from the past two years, the average transaction size is more than double what it was a year ago.
The high prices reflect companies going on the offensive to boost their earnings. The US economy, while growing, still is not booming. Since the end of the recession, companies have had to act defensively - protecting profits by cutting costs through lay-offs or benefit reductions or by moving manufacturing elsewhere.
In an effort to lift earnings and please shareholders, S&P 500 companies have also announced plans for nearly US$1 trillion in buybacks over the next several years, and more than four-fifths now issue a dividend, the highest proportion since 1998.
With their tool box nearly depleted, corporations "are looking for that extra bump" in sales now, Walsh said. A lot of Deloitte's M&A business has been with companies "looking to expand their product lines or expand geographies".
Buying Time Warner Cable gives Comcast roughly 30 million customers in markets such as New York. For Facebook, WhatsApp is an opportunity to buy a fast-growing message service that is popular in emerging markets and Europe.
Facebook chief executive Mark Zuckerberg has said he expects WhatsApp, which currently has 400 million users, to grow to one billion users in the near future. Ireland-based Actavis gains both a broader variety of drugs to sell and a larger sales presence in the US with its acquisition of Forest Labs.
Another example is Japanese liquor company Suntory, which in January said it would buy Beam, the maker of Jim Beam and Maker's Mark, for US$14 billion.
Suntory chairman Nobutada Saji said the deal would "allow us to achieve further global growth".
Getting into the whisky business was next to impossible, said Thomas Mullarkey, an equity analyst at Morningstar.
The popular liquor needs to be aged in barrels for years. While Suntory has a good niche market selling Japanese whisky to the Japanese, it could never replicate or grow that business in the US.
"It's faster and cheaper for Suntory to buy Beam," he said.
High stock prices, reflecting the strength of corporate balance sheets and the confidence of chief executives, are also encouraging more deals.
"A healthy M&A market ultimately represents a flourishing economy," said Martyn Curragh, head of US deals for PwC. "Seeing a big deal come together successfully helps bring confidence to other companies who are possibly looking at doing a deal.
"I don't think we've seen the floodgates open yet, but looking six, 12 months down the road, we're definitely looking at a big increase."
