December 16, 2014 - An article by Douglas Nix, CA,CPA
“Growth has gotten scarce. In the Standard & Poor’s 500 index, annualized non-acquisition organic growth was 2.7% in 2Q2014. We are in a slow growth market that rewards growth”. Barron’s
I’d like to share with you something that we have been seeing in the marketplace today. There has been some press lately saying that there’s an M&A frenzy happening, but I don’t quite share their levels of exuberance on this. I think the conditions are right for a frenzy, there’s high pressure on pricing and there are people complaining that deal flow is tough because of valuations, but what we see is that there is a lot of available capital, low interest rates and low organic growth.
Subject to economic policies, growth and other factors happening in several countries around the world, a lot of what’s holding people back from making acquisitions is their own concern. There’s the Euro zone, there’s Greece (is Greece going to fail?), is there hard landing, soft landing, fiscal cliffs? All of that has pushed us behind, but now corporate executives are taking a look at it and thinking that, now that some of the uncertainty is gone, maybe it’s time to get on with business.
The financial markets are encouraging companies to make acquisitions, and what happens to the stock price of the company the day after the announcement of an acquisition is how they track it.
Recently, Barron’s published a piece saying that the problem is we are living in a slow growth economy, but the markets reward growth. So, if you are the CEO of a company, and the market rewards growth but you don’t have the ability to grow organically, what are you going to do? Well, that comes down to you making acquisitions.
One of the factors that are driving the acquisitions statistics is that there have been some really large deals announced. These are the top 15 acquisitions on the first half of 2014 on Thomson Reuters:
We can now see why people are saying there’s an M&A frenzy happening. There’s half a trillion dollars of announced acquisitions on this table - what’s driving the global market is a smaller number of acquisitions at a higher dollar value, and if we look at the 9 month comparatives on announced volumes below, from 2007 through 2014, we will see that there were 2.7 trillion dollars of announced transactions in the first half of 2014. We could think that’s increased significantly from last year, but we can’t pay a lot of attention to the dollar value of the announced transactions. What we have to focus on is the number of transactions, because it’s very easy for the stats to be distorted based on a few larger deals. Therefore, if you don’t consider these top 15 deals, the dollar value goes down significantly.
If we take a look at this next figure, we have now the number of transactions for that same time, and we will be able to see that it doesn’t look like a frenzy. So when we are talking to people, we need to pay attention to the number of transactions rather than their general value, because that’s a better indicator of the acquisition activity. Remember what Mark Twain said: “there are three kinds of lies: Lies, Damn lies and Statistics”. It’s important to know when not to fully believe them.