North American M&A: What’s Driving Optimism?
The latest Intralinks' quarterly Global M&A Sentiment Survey highlights an interesting find related market outlook for North American M&A activity.
4 March 2016
The latest Intralinks' quarterly Global M&A Sentiment Survey highlights an interesting find related market outlook for North American M&A activity. North American dealmakers seem to be shrugging off prior concerns over U.S. interest rate policy, economic slowdown in China, a slowing global and U.S. economy and the turmoil in emerging markets equities. North America, early-stage M&A activity increased by 5.4 percent in Q4 2015, following the 3.2 percent decline we saw in Q3 2015, a dramatic turnaround that bodes well for North American M&A activity in 2016, says the Intralinks Deal Flow Predictor.
Furthermore, almost half (48 percent) of North American-based respondents to the recent Global Sentiment Survey are optimistic about the deal environment, up from 43 percent in the previous survey. Only 32 percent of North American-based respondents expect a slowdown in Chinese economic growth to have an impact on M&A activity over the next six months, compared to 68 percent, 43 percent, and 36 percent respectively, of deal makers in Asia Pacific, Latin America, and Europe, Middle East and Africa.
Drivers of Optimism
There are several reasons for North American optimism, beginning with the tailwind of slow but steady U.S. economic growth (particularly compared to the rest of the world). In the immediate aftermath of the Great Recession, preserving liquidity and repairing balance sheets were a priority of most companies. Four plus years of consistent economic growth has brought stability to most companies, but with that stability comes growth expectations. They recognize that the purchase of an existing business that aligns or expands upon current operations could be a faster path to growth.
The Fed’s cautious stance towards interest rate hikes, and the resultant continued supply low interest financing, is another contributor to the positive outlook of the North American deal community. The likelihood of a continued low interest rate environment may result in attractive financing costs for acquisitions. The prospect of an eventual increase in interest rates may also spur deal activity as companies realize that cheap money won’t last forever. Concerns about rising interest rates, the increased national debt, and the end of quantitative easing may contribute to a sense of urgency to take advantage of the current low interest rate environment.
Another potential macroeconomic contributor to increased deal activity is the stronger dollar, especially as a driver of U.S.-Canada deal flow. Transactions between U.S. and Canadian companies could pick up this year as the weak Canadian dollar turns Canadian firms into more tempting targets, especially for a U.S. market that has become increasingly open to the idea of Canadian deals. Infrastructure and electricity investments could be popular, along with Canada’s always-significant mining and energy sectors.
Lower raw material and energy costs due to low oil prices, are another potential driver of heightened M&A optimism in North America. Commodity price weakness has hurt some industries, in particular oil and gas. However, low commodity prices will have a positive impact in the form of reduced operating costs for businesses and consumers generally, and should improve the revenue and profitability of target companies. As a result there should be attractive opportunities, particularly in the energy sector, where there’s reduced valuations and the pressing need for consolidation as a result of financial and business uncertainty.
Finally, we have to consider the potential deal activity impact of the large supply of capital on the sidelines, waiting to be put to work. And as more and more money flows into the market, that should provide near-term support for continued deal activity.
Brian S. Hwang is Director of Strategic Business & Corporate Development at Intralinks. Brian joined Intralinks from RR Donnelley Global Capital Markets where he primarily worked with clients in the Midwest and Northeast, consulting on initiatives related to disclosure issues for SEC financial reporting, US Proxy compliance and transactional due diligence. Brian started his career with New York City law firm Wachtell, Lipton, Rosen & Katz, where he was involved in the due diligence and execution of transactions, valued at over $350 billion.