The M&A boom of 2007 was, with hindsight, the final flourish of a financial system that had become chronically over exuberant. Corporate confidence, skilfully marshalled by dealmakers, pushed the value of global M&A to $1.4tn during the first four months of that year – far more than in any year before or since, until now.
The past month has been dominated by claims, from Wall Street to the City of London and beyond, that dealmaking is back. The numbers go some way to corroborating that: global M&A is at about $1.2tn for the year to date, the highest level since 2007 and 42 per cent up on a year ago.
But beneath the headline numbers, there has been a fundamental shift in the way deals are being done.
The most telling change – and one that bankers argue makes this a very different market to 2007 – is the way in which deals are being financed.
One of the hallmarks of 2007 was the use of cash to fund deals, as companies borrowed billions to fulfil their M&A ambitions. Deals where only cash was used accounted for 76 per cent of the total market during the first four months. This year, all-cash deals account for 47 per cent of the market, the lowest level since 2001. In contrast, deals purely paid for with stock have accounted for 19 per cent of M&A this year compared to 8 per cent in 2007.
At the same time, there has been a surge in the number of transactions being financed with a combination of cash and stock. Usually a small part of the overall market, cash-and-stock deals have accounted for a third of all M&A in the year to date, almost 10 percentage points higher than any previous year on record and well above the 14 per cent in 2007.
The increased use of stock in deals reflects the stellar re-rating of equity value that most companies have enjoyed during the past year. The trend, which also creates an artificially high overall number for the value of M&A activity, was encapsulated in Facebook’s $19bn takeover of WhatsApp, the mobile-messaging group.
“I don’t see the “frothiness” in the current market that 2007 had, despite the recent spate of deals,” says Paul Parker, head of global M&A at Barclays. “This market is characterised by large, well-capitalised companies doing large, strategic, synergistic deals for cash and stock”.
FX de Mallmann, global co-head of Goldman Sachs’ consumer retail group, adds: “2007 was a peak year at the end of a run up in transaction volume, executed in a strong capital markets environment and in many cases with the use of meaningful leverage. Now, we are at year six since the beginning of the financial crisis. The uncertainty of the past period meant that the risks attached to launching significant transactions were perceived as too high.”
Most of what is happening now is not new; a number of these transactions have been in the drawer for a while, waiting for the stars to align
The notion that the deals being executed presently are more rational or value-creating than those of previous M&A cycles is one that bankers could be forgiven for promulgating. However, investors, too, appear united in the belief that the recent run of dealmaking, while large in absolute value terms, is more measured than past booms.
Throughout the past 20 years, one factor has been almost universally true when it comes to M&A: in boom periods and in less excited times, the share prices of companies making acquisitions decline on the news of the deal.
In the past two years, that trend has started to change, albeit in a period of modest activity. In 2014, though, the share prices of acquiring companies have gained 4.4 per cent within a day of a deal being announced, the highest post-announcement increase since Dealogic began tracking the data in 1995.
One explanation is that many of the transactions being completed are not deals hastily assembled under the glow of returning confidence.
“Most of what is happening now is not new; a number of these transactions have been in the drawer for a while, waiting for the stars to align,” says Mr de Mallmann, who last month helped Holcim launch its $40bn merger with rival cement maker Lafarge. “Most of the ingredients for a turnround in M&A activity have been there for some time.
“The missing piece was CEO confidence – but that has come back too, on the back of a better macro economic outlook and a significant re-rating of stock prices.”
Mr Parker, who is working on Comcast’s $45bn merger with Time Warner Cable, adds: “[The market] is coming back, but there is still reticence out there. The actual numbers of deals are down, even with up volumes, so the pace of calls to do deals is clearly less than it was in 2007.”
The ticket size of deals in 2014 is also higher than normal. So far this year, there have been 13 M&A transactions worth in excess of $10bn, representing a third of the overall market.
Since 1995, so-called mega-deals have accounted for an average of 22 per cent of all deals. The larger deals are a consequence of a consolidation flurry in the pharmaceutical and telecom industries, both of which have scores of very large companies
Some bankers suggest that the recent hype over a return to boom times is overplayed, however.
“What’s different in 2014 compared to 2007 is that there has been a significant divergence between M&A and the equity markets over the past few years, which are usually highly correlated,” says Bob Eatroff, co-head of US M&A at Morgan Stanley. “The equity markets rose over 30 per cent last year, while M&A was flat. This year’s level of M&A activity is just a reversion to the mean.”