2014 may end up being known as the year of M and A.
Merger and acquisition activity has soared. Thomson-Reuters puts the total value of deals in the U.S. at well above the $1 trillion dollar mark. That’s an increase of more than 50% from 2013.
Yahoo Finance Senior Columnist Michael Santoli says several factors have been behind companies’ desire to tie the knot.
“You had the ideal conditions to fuel an M&A boom,” he argues. “You have high stock prices which give CEOs confidence and gives you a very expensive currency you can buy things with, interest rates are very low, the corporate bond market and bank loan market are very generous, so you can finance almost any deal.”
Santoli notes that timing is a big factor as well.
“It happens at the latter part of any bull market and in a corporate profit cycle,” he notes. “We’ve had a profits boom for five years now, and a lot of companies are in the position of saying: ‘We’re not really sure how much organic growth we can count on, let’s look to see if we can strategically buy some more growth or somehow set up our business in a smarter way.’”
But Santoli points out it's often the case that during times when companies are looking to gobble up firms, we also see other companies trying to get rid of divisions they see as underperforming.
“They call it on Wall Street ‘fit and focus,’” he says. “When you basically have no fires to put out and profits have been higher for a while and it seems like the world has been kind of calm economically, it’s time to figure out what you want to be as a company. And that creates this impetus for spinning companies off.”
Another factor in these breakups-- big money investors putting heat on corporate executives to increase shareholder value.
“We’ve seen this boom in activist investors, rattling the cages of companies,” he notes. “Often what they want you to do is get rid of one division or sell it to somebody else or just put the whole company up for sale.”
Santoli believes conditions remain in place for the M&A boom to continue into the new year.
“You’re going to see people try to buy growth and be opportunistic in areas such as energy where you’ve had a lot of assets depressed,” he says. “And again, it’s late bull market activity. This is the kind of thing that keeps rolling usually until stock prices stop going up.”
And Santoli says so far, Wall Street isn’t giving firms any reason to stop their buying spree.
“One indicator that it’s not so silly is that the companies doing the buying, their shares are going up,” he points out. “Which means the market says you’re not doing anything crazy right now.”
But Santoli says history has shown that when M&A activity does get crazy, that’s a good indication the fat lady is about to sing for this long-running bull market.
“Ultimately, hubris takes over, really big, ambitious deals that don’t make a lot of sense or cost too much always happen,” he explains. “And they happen near a market top.”