A quick look at a timely topic of interest – with a brief review of why it could matter to investors.

Chart of the Week
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December 22, 2014

Dealing for dollars
Value of announced M&A transactions (rolling 12-month total)

chart

Source: Bloomberg, as of 11/30/14. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The total value of US mergers & acquisitions (M&A) turned sharply higher in 2014, rising nearly 60% from the end of last year through November.
  • Even outside of the US—where growth generally slowed and uncertainty rose—it increased over 24%.
  • Next year could be another solid one for M&A activity as well—with the means to finance transactions readily available with corporate cash at record levels, stock prices up and interest rates still low.
  • While interest rates could move higher next year, they're likely to remain very low by historical standards. Indeed, some argue that the potential for higher rates in the years ahead has encouraged companies to accelerate deal-making, and could continue to do so in the months ahead.
  • Renewed confidence in the growth outlook could also inspire more deals next year—but unless the economy really accelerates, stronger revenue growth for some firms may be more likely found through acquisition than organic sales growth.
  • And with technological advances rife in some sectors, acquiring innovation to strengthen or obtain a competitive position could continue to be a driver of M&A in certain areas of the economy.
  • In the long run, some of these deals will work out better than others; some won't work out at all. That's why in an environment of heightened M&A, active investment driven by bottom-up company analysis may offer advantages unavailable in passive solutions.
  • That analysis could provide opportunities to potentially identify the types of firms with characteristics that make them attractive to others, as well as pinpoint companies that are best positioned to make acquisitions and have the means to carry out their strategies.

The chart:

  • The chart shows the total value of announced M&A transactions over the past 10 years.
  • Non-US transactions are simply global transactions minus US transactions.
  • The value of US transactions at the end of November 2014 was $1.97 trillion, up 58.5% from $1.24 trillion at the end of 2013—the highest level since December 2007.
  • The value of global transactions at the end of November 2014 was $3.2 trillion, up 43.4% from $2.23 trillion at the end of 2013—the highest level since May 2008.
  • The value of non-US transactions at the end of November 2014 was $1.23 trillion, up 24.4% from $987 billion at the end of 2013—the highest level since July 2011.

Definitions:

Merger and acquisition (M&A) is a general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.

Organic growth refers to the growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.


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