The China recession meteor has been hell for stock investors, but it is manna from heaven for the Gordon Gekko types on Wall Street that see bigger merger and acquisition opportunities from cheap valuations and rock bottom borrowing costs for big rich firms.
In the seven months since collapsing Chinese stocks began spreading fear and loathing across the world, stock markets around the world have plunged in value by almost $5 trillion. The breadth of the historic pain has metastasized from China and its emerging markets natural resource suppliers to even technology unicorns that have seen evaporating billion-dollar valuations.
But dealmaker and top accounting firm Ernst & Young’s latest Transaction Services Report highlights that 2015 was a record year for U.S. deal making and “2016 pointing to ongoing resilience for the M&A market.”
E&Y called 2015 the “Year of the Megadeal,” with 47 deals completed at values over $10 billion, up 235 percent from the 20 such megadeals in 2014. Seven of the ten largest global deals involved U.S. companies.
Overall, 2015 saw 252 U.S. M&A deals at values in the $1 billion-to-$10 billion range out of 10,845 transactions completed. E&Y said that was up a “staggering 55.1 percent” to a record high of $2.3 trillion, compared to $1.5 trillion in 2014.
The outlook for 2016 looks forward to an even bigger year, according to E&Y’s annual Global Capital Confidence Barometer. They found 74 percent of U.S. respondents reporting “M&A plans in the next year.” That is an all-time high since the Barometer was launched more than six years ago. The report added, “A similar percentage of our respondents say the valuation gap between buyers and sellers is small–indicating, in essence, that there’s never been a better time to do a deal.”
Other interesting take-aways from the survey include that 86 percent of corporate executives view cybersecurity as a strong deal process risk, and 96 percent of executives are willing to walk away if price and deal terms are not right.
U.S. companies looking to making acquisitions already have three or more deals in their pipeline, versus just 10 percent of companies six months ago.
What initially is driving the process is concern by companies that with internal growth slowing, it is better to invest in buying growth. After recent market declines, global equities now trade below their 10-year median average of 13.5 times forward price earnings ratio (P/E). Over the last 25 years, U.S. equities traded at a higher forward P/E two-thirds of the time, while EU equities were more expensive over half of the time.
But what is making the Gekkos drool is that the rising fear of recession has slashed the cost of long-term borrowing for high-credit worthy companies to near record low interest rates, versus U.S. high yield risk spreads near the all-time-record highs of 8 percent only seen in the 2001-02 Dot-Com crash.
E&Y sees changing consumer preferences and technological disruptions spurring a new wave of M&A mega-deals with U.S. executives that are searching for targets outside of their own business sectors. About 93 percent of US companies that are planning 2016 M&A deals are working on cross-sector acquisitions, with 43 percent seeking access to new ideas or production technologies. But the big focus is on customer behavior change:
“Changes in customer behavior lie at the core of shifting competitive dynamics across sectors,” said E&Ys Chair of Transaction Advisory Services, Rich Jeanneret. “If companies want to protect market share, they must find a way to adapt, align with changing customer tastes, or innovate such that they are driving the next ‘big idea.’ Often times, this means turning to M&A for new materials, intellectual capital or evolutionary technologies.”