Contrary to the image of a high-flying investment banker, by almost any measure, it's been a tough year for mergers and acquisitions. According to the latest M&A data from FactSet, the total number of deals is down nearly 7% so far this year, and the dollar value of all this partnering is off by more than 19%.
But at least one Wall Street strategist thinks we might be on the cusp of change and says the widely held growth expectations of shareholders and managers of public companies are unrealistic.
"You can't achieve those levels of growth with the sub-par economic growth we have in the U.S. and the virtual recession we have in Europe," says Nick Colas, Chief Market Strategist at ConvergEx Group, in the attached video. "So what's the answer? The answer is, you're going to have to start cranking up the M&A machine to get better growth through acquisition rather than just worrying about the economy."
As he sees it, this disposition to deal can be a blessing and a curse. While many market observers have almost derisively dismissed record profits and cash levels amongst public companies as a sign of greed or as the result of a system that only rewards the rich and powerful, Colas points out that's just not the case.
In fact, much of these past gains and profits were the result of cost cuts and efficiencies put in place to weather the last recession and are more the result of savvy management and prudent practice than rising GDP.
"When growth slows, the first thing that happens in many industrial sectors is consolidation," he says, pointing to the recent consolidation in the auto and financial services sectors. But don't be fooled, rather than having a ''big, make-or-break merger of equals," he says this wave of matchmaking needs to be done on a small scale and needs to be efficiently executed in order to succeed.
In fact, those so-called mega deals are the one thing he says investors need to be wary of — while smaller ''tuck-in acquisitions" should do okay.
At the same time, Colas points out that the other side of the coin — the divestiture or spin-off — is also expected to see increasing action since ''they usually make sense" and add value. "When you give a management team of a division total control over a company, they do a lot more aggressive things to grow."
Which brings us right back to where we began and the probability that more companies seek to hit their growth targets via the dealbook when economic growth is scarce.