After a blistering final quarter of 2016, the first few weeks of 2017 have seen dealmakers continue to mine a rich seam of M&A, with big ticket transactions including Tesco’s acquisition of Booker and Reckitt Benckiser’s bid for Mead Johnson hitting headlines in the UK, and Luxottica and Essilor’s €50bn (£42.4bn) merger among many others making waves further afield.
And just when we thought we would be able to stop and catch our breath, Kraft then popped up with its bid for Unilever.
But with continued geopolitical uncertainty and increased regulatory scrutiny seemingly not going away any time soon, is this an M&A bubble that’s in danger of bursting?
Call me optimistic, but I actually believe this is only the start, and that both domestically and globally, we will witness an unprecedented increase in deal activity over the next few years.
There are a number of contributing factors driving this. When taken in isolation, these ingredients perhaps wouldn’t cause too much of a stir in M&A terms, but taken in aggregate, I believe we are looking at a very powerful cocktail.
Consider, for example, that the average tenure of a chief executive has shrunk from seven to 10 years to something closer to three to five years. The pressure for a chief executive to dramatically make their mark on a business is more intense, for typically they now have a shorter window in which to drive growth and shareholder value. The pursuit of organic growth can often be a long game, so the chief executive has to look at other means in which to make an impact.
Consider too the influence of shareholder activists, who are now very much part and parcel of corporate life. Such activists aren’t there to go with the flow, but to agitate and shine a light on boardroom performance – again, putting pressure on boards to take bold actions.
Geopolitical risk is heightening developed market risk. This will narrow the country risk premium between developed nations and developing ones, which in turn will trigger more funds flowing to growth economies in Asia.
Other factors are at play too. The line between M&A and R&D is becoming increasingly blurred. At the same time, tax is being used as a tool to influence the flow of capital. Then throw into the mix an ageing population across many western economies, and the fact that it is unlikely that oil prices will get back to $100 per barrel anytime soon.
Taken individually, none of these items would perhaps move the needle significantly. But stick them all into a melting pot and it’s hard to imagine that we are on the brink of a period in which corporates will batten down the hatches and play it safe.
We are now facing a sustained period of “low and slow” – low interest rates and slow growth. Debt is therefore not only available in abundance, but you now have a sustained period of certainty over its cost.
From an investor perspective, a risk balanced portfolio is likely to yield no more than 3.5 to 4 per cent over the next five to seven years. Meanwhile, infrastructure assets are facing yield compression. This could have two impacts. First, such low levels of returns mean chief executives, who are already under increasing scrutiny, cannot afford to put their businesses on autopilot. They will have to be active in terms of either organic or inorganic investments.
Second, such returns could see a flight of capital from public to private markets – indeed, we are already seeing some holders of capital invest directly. This will result in financial sponsors accumulating greater levels of capital, prompting them to diversify their asset classes even more. In turn, it also may be harder for smaller financial sponsors to attract funding as returns will be harder to achieve and their management fees will become increasingly untenable.
You may ask yourself why all this is good for dealmaking. While executives tend to crave certainty and stability, experience tells me it’s actually volatility and uncertainty that inject impetus into deals – and the one thing I don’t see coming down the track over the months ahead is calmness and tranquillity.
So hold on tight. We dealmakers could be in for a busy time.