An M&A Explosion

By Generational Equity

10/10/2014

By many expert predictions, we are sitting on the cusp of the next M&A up cycle. The numbers so far this year, based on a variety of sources, are all pointing to the same thing: The next 18-24 months could outpace the prior merger and acquisition spikes prior to the Great Recession.

This message was supported recently by Jeremy Grantham, co-founder of GMO (a privately held global investment management firm servicing clients in the corporate, public, endowment, and foundation marketplaces) and a well read and well known expert in the world of investment management.

He recently released his latest quarterly newsletter that is sent to all of GMO’s clients. In the newsletter he addressed what he anticipates for mergers and acquisitions throughout the next several months, as reported by Business Insider:

“In this letter, Grantham commits some time addressing the current M&A boom that we have been witnessing this year. He actually believes the next leg of this boom could be a truly historic one. ‘Don’t tell me there are already a lot of deals,’ he writes. ‘I am talking about a veritable explosion, to levels never seen before.’ "

His expectations are in line with what others are saying as well. As we have explored in the past, 2014 is shaping up to be a record year for M&A transactions worldwide, especially in the U.S. The reasons, according to Grantham, are clear:

1. Cheap debt: "…when compared to other deal frenzies, the real cost of debt this cycle is lower…"
2. High profit margins: "…profit margins are, despite the first quarter, still at very high levels and are widely expected to stay there…"
3. Young-looking recovery: "…the economy, despite its being in year six of an economic recovery, still looks in many ways like quite a young economy…" Grantham notes that there is slack in the labor market and room for capital spending.

And based on all of these factors, he is expecting the following: “I think it is likely (better than 50/50) that all previous deal records will be broken in the next year or two."

As you can see from the following chart, the last peak in deal value was 2007 and the last peak in deal volume was 2011:

Mr. Grantham is predicting both will be eclipsed in the next few years!

Only time will tell if he is correct. The bottom line for business owners to be aware of today is that buyers are active and are looking for well run, profitable companies. If you own one, you better be prepared for the eventual call from a buyer.

To be prepared, you need to have a good understanding of the merger and acquisition process. To help you out with that, Generational Equity holds complimentary, no-obligation, educational M&A workshops throughout North America on a regular basis. To find out when we will be in your region next, call us at 972-232-1121 or fill out a contact form.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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