THE BLOG

The Window of M&A Opportunity for Transformative Deals Remains Open

08/13/2014 01:29 pm ET | Updated Oct 13, 2014

The value of global M&A transactions conducted in the first half of 2014 hit US$1.7t -- the highest since the deal boom before the global financial crisis. Time Warner - Comcast (US$69bn), Shire - AbbVie (US$56bn), Lafarge - Holcim (US$40bn), WhatsApp - Facebook (US$19bn), Beam - Suntory ($16bn)... the list goes on. We've seen more than 20 proposed deals above the US$10bn mark so far in 2014. And that list will probably grow.

A broad-based recovery across a variety of sectors driven by the US should see market conditions continue to foster this trend -- making the next 6-12 months an ideal window of opportunity to do transformative deals.

Why is that? Strong fundamentals for deals are in play: high equity valuations, low interest rates and cheap debt, as well as strong cash piles provide a highly favorable environment for dealmaking.

Investor sentiment is also supportive of bold acquisition strategies as the hunt for high-quality intellectual property and brands continues, with businesses searching for growth in a low growth environment.

These ideal conditions for transformative deals will not last forever. Interest rates will rise, equity values will move and the competition for high-quality assets will only intensify with private equity in the mix.

Leading companies will look to do smart and strategic M&A transactions before the current deal climate changes so we can expect more of large, headline grabbing acquisitions to come. The environment is right and the rationale to do the deals is clear: gaining share in existing geographical markets, movement into new product and services areas and expansion into new geographical markets are the three most sought-after reasons for doing big-ticket acquisitions. Inversions also provide an added impetus.

The 50 percent uptick in deal value in 2014 compared to 2013 has seen the number of $1bn+ deals increase by 35 percent as companies engage in bolder M&A transactions. In comparison, global deal volumes continue to flat-line after years of falling activity. However, recent modest increases in deal volume in the US market (up 7.5 percent in the second quarter on 2013), might point to a future resuscitation of deal volumes globally.

But not just yet. Value not volume has been making headlines in 2014. The M&A malaise has enveloped the market for many years and in 2014, companies and boards have opted for quality rather than quantity when it comes to dealmaking.

And that 'fewer and bigger' trend is likely to continue as companies navigate a very complex set of challenges. Geopolitical issues, modest -- and fragile -- economic growth and increasing shareholder activism is ensuring that managing costs and delivering measured and sustainable growth remains a permanent feature of this complex business landscape. Within that context, we should only expect a modest increase in deal volume globally in 2014-2015.

So, where can we expect to see further mega-deals? The mature markets are driving the M&A story in 2014. In terms of deal value, the top five target countries for assets are: the US, UK, France, Netherlands and Australia. In terms of acquirers, the top five countries are: the US, Canada, Switzerland, UK and China.

As economic growth -- albeit modest -- returns to mature markets, companies are looking at those economies as less risky options for investment and growth. Emerging high growth and frontier markets will always be attractive in terms of investment, but safe and secure modest growth is attracting the most investment as the global economy moves into a new phase.

We can expect mature markets to continue driving high-value, headline-hitting M&A. The appetite for much larger deals isn't going away as executives look to transformational acquisitions to move their topline growth significantly.