A revival in M&A activity has been much anticipated and discussed almost since the start of the global financial crisis five years ago. With few exceptions, boosts in deal making have proven unsustainable.
Things may be changing, and for the better. Confidence is returning, and there are indications that 2014 will continue the strong deal volumes we’ve seen over the last couple of quarters. When we polled 2,400 M&A professionals, 67% of buy-side and 75% of sell-side respondents reported expecting overall M&A deal volumes to increase over the next 12 months.
Several factors are propelling deal activity. First, many firms have increasingly healthy balance sheets. For instance, according to a recent article in the Financial Times, the 100 largest companies listed on the London Stock Exchange have increased their gross cash on balance sheet by more than 30% since the global financial crisis began. Second, there are signs that the financial climate is improving. As has been the case for some time now, larger, more credit-worthy companies are able to take advantage of historically low interest rates, and may be more inclined to embark on debt-financing deals as a result. Even companies with previously limited access to capital markets are finding it easier to take advantage of relatively cheap funding as investors hunt for yield. The value of acquisition-related high yield finance so far this year has reached its highest level in six years. However, for firms not already well-positioned financially and yet solely reliant on bank lending, access to funding remains challenging. Third, a global economic recovery looks to be underway, with the U.S. leading among the advanced economies, and the Eurozone also expected to resume modest growth after the contractions in output seen in 2012 and early 2013. As the U.S. is the largest single target market, and Europe the largest global region, in terms of M&A, this recovery bodes well for increased levels of deal activity.