The figures show that US M&A markets have roared back to life in 2014. Deal volumes are up by close to a third, and deal values are at a five-year high.
On the back of a growing economy, along with rising corporate and shareholder confidence, attention is turning from cost cutting and restructuring to growth and long-term strategy.
A number of trends point to this renewed confidence. The number of hostile takeover attempts is up, megadeal volumes are at a six-year high and companies are increasingly using equity to fund deals. Increasing inbound activity and a strong run of exits for private equity firms further underscores the positive sentiment toward US M&A.
There are still opportunities for megadeals, particularly in the TMT and pharma sectors, which have been the main drivers of large deals so far. Shareholders remain supportive of acquisitions, something reflected in the stable stock prices of business that announce acquisitions. Meanwhile, overseas buyers, especially those from China, are becoming more comfortable with the US deal culture and regulatory processes such as CFIUS.
The drivers that have underpinned the resurgence in US M&A in the first half of 2014 remain in place to continue supporting M&A through the rest of this year and into 2015.
The outlook for the US economy is positive, with the IMF forecasting faster growth for 2014 than the previous year. The housing market has recovered, and jobless claims are falling.
But although the M&A market has rebounded and the outlook is positive, companies pursuing M&A should still act with a degree of caution.
Megadeals have accounted for a large portion of the increase in deal values, and a dip in large deal volumes could check momentum. Dealmakers should also keep an eye on the performance of large deals. If one of the blockbuster deals fails to deliver, M&A activity could ease as corporates reassess their strategies. On the regulatory front, changes to legislation on tax inversions could knock sentiment, and although antitrust and CFIUS issues have become less prevalent, they remain risks.
Against this backdrop, corporates seeking to make the most of the returning deal flow to the United States should keep the following in mind:
Think through your strategy.
Shareholders want boards to turn their attention to growth and are broadly supportive of M&A. They will only back deals, however, that are based on solid deal rationales. Opportunistic deals, done simply because a target is available and there is cash on the balance sheet and debt available, are unlikely to receive the blessing of investors.
Focus on due diligence.
The S&P 500 has been hovering at near-record highs and valuations are full. As prices reach these record highs, and contracts favor sellers, the risk of missteps increases and the protections provided by due diligence become more and more critical.
Diversify your sources of acquisition capital.
When prices are full it is worth mitigating risk by using a variety of acquisition capital to fund a transaction. Paying with stock means a target shares some of the risk, and although many corporates are cash rich, debt is available and attractively priced. It is worth using it.
Watch the regulators.
Regulation has not had much of an impact on dealmaking in 2014 but that trend may very well shift. CFIUS remains an obstacle for foreign investors, and tax inversions are a high-profile issue, with a recent change in the rules around them being introduced. Antitrust impediments have not been a feature of deals, but the TMT sector, one of the major engines of M&A growth, is receiving more scrutiny as the industry consolidates and the number of service providers shrinks.