7/8/2015

Why This Merger Boom Is Different - Bloomberg View

C OMP A N IE S

WhyThisMergerBoomIsDifferent

JUN10,201411:56AMEDT

ByPeterR.Orszag

aA

Asonecansensefromallthenewsaboutmergersandacquisitionslately,thesedealsareboomingagainworldwide.What'snewthis
timeisthatmarketsarerewardingthebuyingcompaniesandnotjustthosebeingsold.Whyisthishappening?
GlobalM&AactivitysinceJanuaryhasincreasedatitsfastestpacein14years.Bigtransactions,inparticular,aresurgingtherehave
beenroughlytwiceasmanyabove$10billioninvaluesofarthisyearthanatthispointin2013.
Whatisstrikingabouttherecentactivityisthatthecompaniesdoingthebuyingarebeingrichlyrewardedbythemarket.Usually,the
market'sresponsetobuyersisnegativeor,atbest,tepid.(Thesellersareadifferentstory.)
Inparticular,asanewreportbymycolleaguesatCitigroupInc.shows,inthe74"transformational"dealsdealsthatareeither
greaterthan$10billion,or$5billionto$10billion,andatleast40percentoftheacquirer'smarketcapitalizationsince2011,the
buyer'sstockpricehasappreciatedbyanaverageof1.5percent,relativetothemarketasawhole,aroundtheannouncementofthe
deal.(Disclosure:IamthechairmanoftheFinancialStrategyandSolutionsGroupatCiti,whichproducedthisreport.)
Also,duringtheyearfollowingtheannouncement,thebuyer'sstockhasexperienced,onaverage,a5.6percentriskadjustedexcess
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Why This Merger Boom Is Different - Bloomberg View

return.Andforthesmallernumberofrecentdealsonwhichreturnscanbemeasuredoverthreeyears,theextraordinaryperformance
hascontinuedforthatlong.
Whatcouldbecausingthemarkettohavesuchastrongpositiveviewofrecentdeals?Acombinationofsloweconomicgrowthand
lowinterestrates,alongwithdiminishingreturnsforsharebuybacks,mayhelpexplainit.Here'show.
Inarelativelysluggisheconomy,it'sharderforcompaniestogeneratefastrevenuegrowth,andinvestorsseemtobelievethatit's
becomingmorechallengingtoboostearningsgrowthbyfurtherstreamliningexistingcorporateoperationsthestrategythatwas
deployedheavilyoverthepastseveralyears.Nonetheless,equitymarketsarestillpricinginrelativelyrapidearningsgrowth:2014
earningsprojectionsaresignificantlyhigherthanglobalGDPforecasts.
Becauseorganicgrowthaloneisunlikelytodelivertheearningsgrowthinvestorswant,strategictransactionsthatcandeliver
increasedearningsareworthmorethanusual.Duringtimeswhentherearemoreopportunitiesforrapidorganicrevenuegrowth,in
contrast,investorsseelessneedforinorganicgrowthalternatives.
ArelatedmechanismmaybeatworkinthepresentM&Aboom:Overthepastthreeyears,15percentto20percentofgrowthin
earningspersharehascomefromcompaniesbuyingbacktheirownshares.Suchactivitytypicallyhasdiminishingreturns,however,
asthemarketbecomesskepticalaboutthesheernumberofsharerepurchases.Ascompaniesapproachthisthresholdafteryearsof
substantialbuybacks,therelativereturnformergersandacquisitionsmayincrease.
Afinalcharacteristicthatdistinguishesthecurrentenvironmentisverylowinterestrates.Thevalueofamergersometimesneeds
timetotakehold.Giventhetimevalueofmoney,earningsgainsfromacombinationthattakeyearstoberealizedarevaluedmore
wheninterestratesarelowthanwhentheyarehigh.
Also,wheninterestratesarelow,buyershavelittletroublefinancinglargedeals.Strongstockmarketsmakeiteasiertouseequityas
financing,debtmarketscontinuetoofferlowcostfinancing,andcompanieshavelargecashreservesthatcanbetapped.Themarkets
havelatelybeenhappywithdealsregardlessofhowtheyarefinanced,thoughcashordebtfinanceddealshavedoneabitbetterthan
others.Thosefinancedmostlybyequityhadoneyearexcessreturnsof4percent,comparedwith11percentforthosefinancedmostly
bycashordebt.
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IfexcessM&Areturnsstemlargelyfromsloweconomicactivityandlowinterestrates,thentheyaremorelikelytocontinueifthe
economyistrulyexperiencing"secularstagnation,"inwhichlowgrowthisthenewnormal.Inaforthcomingcolumn,I'lltalkabout
theprospectsforavoidingthatandgettingtofastereconomicgrowth.
ThiscolumndoesnotnecessarilyreflecttheopinionofBloombergView'seditorialboardorBloombergLP,itsownersandinvestors.
Tocontacttheauthoronthisstory:
PeterROrszagatporszag3@bloomberg.net
Tocontacttheeditoronthisstory:
MaryDuenwaldatmduenwald@bloomberg.net

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