An increase in M&A activity is likely this year and you can take advantage of it in three ways: purchasing companies that are prospective takeout targets; buying companies that have a proven record of successful acquisitions; and buying financial institutions like Morgan Stanley, JP Morgan and Royal Bank that make money brokering the deals.
The current low-rate environment is conducive to raising the capital needed to execute such deals. Coupled with the consensus outlook of higher rates going forward, companies are motivated to complete deals sooner rather than later to lock in cheap financing.
There are other reasons why M&A is poised to trend higher over the coming months. First and foremost is rising confidence among C-suite executives across the globe. Since the recession, corporations have been favouring returning capital in the form of dividends and share buybacks, rather than reinvesting in the business. With five years of positive equity performance and far less macro uncertainty, corporations are less adverse to using capital for non-organic growth.
Another reason pointing to higher M&A activity is the firepower on companies’ balance sheets. Credit Suisse recently reported that the corporate sector would have to spend $2.3 trillion to return leverage to average levels. On top of that, private equity firms have nearly $1.1 trillion in capital ready to deploy.
Lastly, it’s far cheaper to buy growth than it is to build it. We don’t need to look far to see an example of that. Richardson GMP nearly doubled its assets under administration overnight with the purchase of the Macquarie Private Client group. Growing organically by taking the approach of adding one advisor at a time would have taken many years to get to the same size and would have been accompanied by an immeasurable amount of risk.
Taking a global perspective, the percentage of companies trading below their replacement value is 43%, 34%, 26% and 5% in Japan, Emerging Markets, Europe and the US, respectively.