Growth through mergers and acquisitions has already surpassed $1.7 billion this year, which is the fastest growth rate in value ever recorded. According to accountancy firm Deloitte, this figure is already well beyond the $1.3 billion in M&A growth recorded for the entire year of 2017.
Major deals this year include AT&T’s planned acquisition of Time Warner Inc., as well as healthcare mergers such as Cigna-Express Scripts and CVS-Aetna. But what exactly is behind these historic growth rates, and is this kind of performance sustainable in the long run?
What’s Driving the Growth in M&A Activity?
While it’s impossible to trace the M&A boom to any single cause alone, there are a number of trends that are likely encouraging companies to spend big.
According to Iain McMillan, head of M&A at Deloitte, companies’ strong balance sheets are being matched with robust debt markets, creating a perfect storm for mergers and acquisitions. If they haven’t already closed a big deal in the last several years, many companies might be feeling the pressure to compete with their business rivals.
Shareholder activism is also on the rise, as investors seek to put significant pressure on corporate management in order to influence the direction of the company. As a result, many boards and executives feel the need to make changes and shake things up with a well-chosen merger or sale, hoping to boost investors’ returns in the process. 70 percent of companies say that they plan to make at least one sale this year.
A 2018 Deloitte survey found acquiring technological assets is the most important strategic reason for why 20 percent of companies engage in M&A deals. Another 12 percent of companies say that they make M&A deals primarily as part of their digital strategy.
Meanwhile, traditional drivers of mergers and acquisitions, such as entering new markets or acquiring new talent, have declined in importance.
What’s the Future of M&A Activity?
Although M&A growth is up overall, this statistic tells only a small part of the entire story. For example, the actual number of M&A deals has fallen by 10 percent, despite the record-setting growth rates. This is due partially to a massive increase in deals valued at $5 billion or more.
The Deloitte survey also reports that companies have fewer worries about M&A when compared to 2016. Only 20 percent of businesses say that global economic uncertainty is a concern for them, down from 26 percent two years ago. Anxieties about capital market volatility and interest rates have also noticeably decreased.
If this dramatic M&A growth is to slow down, then, it’s not likely to be due to companies getting spooked.
There is one way in which M&A deals are getting more restrictive: geographical proximity. 34 percent of companies say that less than one-fifth of their deals will be internationally focused, an increase from 26 percent in 2017.
Canada, Central America, and Australia were among the most attractive regions to private equity firms. Meanwhile, interest in Chinese and Japanese investments has dropped precipitously from a year before.
Finally, new technologies will continue to shape and affect the way that M&A deals are conducted. Cutting-edge digital platforms can make it easier than ever for new businesses and systems to integrate with each other.