With multiple billion-dollar deals already announced this year, total takeover-deal announcements are on pace to reach $4.58 trillion in 2015. This mark would exceed to previous record high of $4.29 trillion set in 2007, just before the global financial meltdown.
This sudden surge in Mergers and Acquisitions (M&A) is being driven by a unique macroeconomic landscape. The first major factor is the slowing pace of profit and revenue growth. According to FactSet, profit growth among the S&P 500 companies is set to decrease by about 1% in the second quarter of this year, which is significant when compared with the profit level growth of 5.5% for all of 2014. This sudden turnaround in profit growth can be attributed to a rising dollar, which makes it more difficult for U.S. based companies to compete overseas, and the unstable market, specifically falling commodity prices. Companies are hoping that these newly announced M&A deals will be able to grow revenue, while providing further cost savings, all with the effect of improving their bottom line.
A second major factor in the M&A wave is the current interest rates. These low rates mean that although many companies have a surplus of cash, it is not earning anything or actively helping the bottom line. Top executives are seeing takeover deals as a way to put this excess cash to work. Low interest rates also mean that debt is relatively inexpensive, and companies are able to borrow money for takeovers with less risk than they would if interest rates were higher. Brain Angerame of ClearBridge Investments states that “Often the economics are quite attractive because you’re either using cash that’s earning nothing, or debt that isn’t expensive". The general consensus that interest rates are going to increase in the near future is putting a time clock on executives who are looking to capitalize on takeover opportunities before rates increase and deals become comparatively more risky and less profitable.
Finally there are some unique conditions across various industries that are causing the number of takeover deals to soar. For example, the well-documented crash in oil prices has made it more economical for larger oil and gas companies to buyout smaller competitors and take over their oil reserves, rather than investing in new, high-risk, exploration projects. This was part of the motivation behind Royal Dutch Shell’s approximate $70 billion buyout of BG Group. New health care laws in the United States have also led to rapid consolidation in the industry. This consolidation includes the $37 billion buyout of Humana by rival Aetna, and the subsequent $54 billion dollar buyout of Cigna by larger competitor Anthem.