Let’s Make a Deal

by Craig Basinger, CFA

In 2015, a new all-time record was set for the dollar value of worldwide mergers and acquisitions (M&A), at an impressive $5.7 trillion. This bested the previous record of $4.9 trillion in 2007 and made the M&A binging late in the tech bubble look small by comparison.

Over time, the market gets bigger, as do the size of deals. Another interesting observation is deal activity tends to peak late in bull markets. This isn’t too surprising, given late in a bull market you typically see more greed than fear. The economic data tends to be doing well, driving aggregate end demand. Higher end demand triggers CEOs to want to expand to meet the demand and often the quickest path to do so is to buy another company.

This raises a couple questions: is the drop in M&A activity in 2016 a sign that this bull market cycle is about to end? How is 2017 stacking up?

2016 Drop in M&A

M&A activity did decline in 2016, dropping -12% from the record set in 2015. This drop was across most sectors, with notable declines in Energy and Technology. However the decline could easily be attributed to market weakness in early 2016. And really, a 12% decrease is not that material. Even with such a decline, it just brought M&A activity back to peak levels set late in the 2003-07 bull run.

A contributing factor was certainly the drop in investment in the Energy sector as oil fell from the $100-per-barrel level in 2015 to below $50. In this kind of environment, it is not surprising CEOs became more cautious. But much has changed in 2017

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