Fast facts and actionable takeaways on five major trends will sustain strong Global M&A activity levels in 2015, says JPMorgan.
A rise in the number of transformational deals of $10 billion-plus in value and an increase in cross-border transactions drove a 27% year over year increase in global M&A activity in 2014, according to a recent market research report by the Mergers & Acquisitions Group of JPMorgan Chase & Co.
The factors that supported deal-making in 2014 are likely to be sustained in 2015, propelling a fresh round of robust activity around the world.
JPMorgan global co-heads of M&A, Hernan Cristerna and Chris Ventresca, say that “a boost in CEO and boardroom confidence was a critical supporting factor in 2014. As the economic recovery continued, global equities rallied and debt markets remained favorable, our clients became more proactive in using M&A to drive shareholder value.”
Equity investors rewarded acquirers for sound synergistic acquisitions that generated incremental growth — the average price reaction to an acquirer’s shares was a gain of 3%1. Target companies with limited upside from their current stock prices were more willing to entertain takeover proposals at a reasonable premium. This virtuous circle of growth drivers fueled the positive M&A story in 2014.
In 2015, it is estimated to amount to at least $4.1 trillion of total volume based on economic and market criteria. The strength of CEO and board confidence, regulatory pressures and economic patterns — GDP growth, equity market stability and cost of capital — will be the key factors to support or derail projected growth. In this respect the recent full value of major equity market indices, which is in line with the 2009 high, should be followed closely for signs of excess valuations.
U.S. inbound activity will also likely mirror activity that was seen in 2014, which rose 92% compared to 2013 with transaction value of $274 billion — a level not seen since 2005.
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JPMorgan Global M&A Forecast (Source: Dealogic/IMF)[/caption]
Full year global M&A deal value for 2014 was U.S.$3.6 trillion. Based on the hypothesis that the M&A/GDP pattern could repeat itself, global activity as a % of GDP could reach 3%, 3.1% & 4% in 2014, 2015 and 2016 respectively, mirroring the actual GDP growth rates of 2002, 2003 and 2004, according to JPMorgan. When matched with the IMF GDP forecast for the same years, this means that activity could eventually reach U.S.$4.1 trillion by 2016.
Shareholder activism will continue to rise globally, encouraging companies to proactively optimize their portfolios and business mix. We expect this to increase deal activity for spin-offs and corporate divestures in 2015. Based on the valuations of major European and U.S. indices, JPMorgan anaysts expect companies to feel pressure to deliver on growth expectations in their stock price and price/earnings multiples.
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JPMorgan M&A Valuations for Europe and U.S. (Source: Factset)[/caption]
Five major trends in M&A identified by JP Morgan:
- Positive acquirer price reactions underline support for growth through M&A activity
- Continued activism growth requires careful consideration to avoid time-consuming public campaigns
- Rise of portfolio separations as a value-enhancement opportunity
- Cross-border transactions provide a significant source of value creation
- Unprecedented sources of finance provide substantial low-cost liquidity to facilitate transformational M&A