Morningstar's "Perspectives" series features investment insights from third-party contributors. Here Tom Stevenson, Investment Director at Fidelity Personal Investing, comments on the comeback of M&A.
Takeovers are back, with deal volumes returning to levels last seen in 2007. The value of mergers is up 73% in the first half of 2014. That’s the strongest first-half gain since 1998, with the global total topping $1.8trn so far this year.
Takeovers are typically good news for shareholders in the businesses that get acquired. But an interesting development this year has been the way in which shareholders are smiling on acquirers too. That’s a reflection of the perceived value that deals can create for both buyers and sellers. Since 2010 more than half of all deals have created a new company worth more together than the value of the constituent parts. In part this is because companies have become more disciplined about not over-paying.
The growth in takeover activity marks a sea-change in business confidence after years in which repairing balance sheets, managing cash-flows and concentrating on the core business has been the priority. They are now more willing to finally deploy their cash-rich balance sheets. We can expect this momentum in deal activity to continue through the rest of 2014, as the value of M&A transactions remains low relative to history.
Low interest rates, companies building big cash piles and limited organic growth opportunities have put in place the ideal conditions for a takeover boom for several years. But until this year, economic uncertainty has put many chief executives off doing deals. As concerns like the sovereign debt crisis and US fiscal cliff have faded away, bosses have regained their confidence and opened their eyes to the many benefits of takeovers. Such benefits include, the closure of redundant plant or production lines, generating economies of scale in purchasing, reducing headcount and streamlining processes. Many companies also see acquisitions as a way to drive growth. This has been a particular feature of the healthcare sector this year. Technology deals have been prominent too.
And it’s not just acquisitions that can add value to a business. Sometimes the ability to sell a non-core activity at the right time can be a good indication that managers are thinking like owners, treating their assets dispassionately. The endorsements that shareholders are giving to acquirers, targets and sellers of non-core businesses reflects the value that companies are creating out of M&A. Takeovers represent a key support for the current bull market and are likely to support equity markets for some time to come.
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