M&A activity has hit $US750 billion through June, a level we haven’t seen in years, thanks to cash-flush corporations, steadily improving growth, and rising CEO confidence, according to Goldman Sachs’s David Kostin.
This is up by around 50% from a year ago.
“If deal-making continues at the current trend, full-year 2014 domestic M&A announcements would reach $US1.5 trillion, the second-highest level in history, trailing only the LBO-fuelled peak of 2007,” he wrote.
Kostin highlights two notable that differentiate this boom from previous ones: financial sponsors like private equity firms account for just 6% of deals vs. 11% over the past decade, and the average bid premium is down to 26% vs. 44% in 2009 amid higher share prices. Here’s why that’s unusual:
For context, at the peak of the LBO boom in 2006 and 2007, private equity accounted for 20%-25% of annual US M&A volume. Ironically, private equity funds currently have significant buying capacity and debt markets are extremely favourable. However, public target company valuations are stretched suggesting forward returns are likely to be muted. This dynamic explains why strategic combinations have dominated 2014 merger volume and LBOs have accounted for a below-average market share.
Here’s the chart showing the flurry of deals from S&P500 firms. BI’s Jim Edwards believes we are now approaching “frothy” levels.