State of the Market Address: 2016
Mergers and acquisitions activity in terms of gross deals’ value across all market capitalization brackets has been at the highest levels seen since 2007. With 2015 being a historic year for activity and the same drivers continuing in the current environment, we are optimistic that this trend in the M&A market to continue well into 2017. We are seeing the heightened activity being attributed to three key factors: organic growth becoming difficult amidst a slow-growth economy, accessible debt financing at favorable rates, and competitors feeling the pressure to consolidate.
Opportunities for organic growth are scarce for many industries due to the sluggishness in the global economy. With top lines going level, companies are looking to expand margins through both horizontal and vertical mergers. Additionally, in the current world of rapidly changing consumer demands, M&A can provide flexibility for firms to meet these demands in otherwise difficult times.
Financing these transactions through debt remains relatively inexpensive courtesy of an indecisive Federal Reserve, but also due to large supplies of capital desperate to be put to use by the banks. With interest rates just off of all-time lows and no shortage of capital to be lent, the accessibility of highly affordable capital is playing a major part in facilitating the current level of deal activity. The current conditions are also favorable for firms seeking alternative investment from private equity. According to the WSJ, PE shops have amassed over $1.3 trillion of non-deployed funds and have been shifting their focus towards the small to mid-cap markets away from the high-profile mega-deals of 2015. The opportunity for businesses in the $10-100MM revenue range to seek equity investments has never been better.
Finally coming full circle due to the key ingredients mentioned above, is the cause and effect of competitors engaging in M&A to keep up with consolidation in the marketplace. In order to remain a relevant player in an ever conglomerating industry, companies must race to stay ahead of the changing landscape.
The mergers and acquisitions market is set to continue the trend of high activity and deal valuation into 2017. We are confident the forces of historically low interest rates, narrowed organic opportunities, and widespread industry consolidation will remain into the near future to fuel an extremely competitive but also opportune time for most businesses to transact.