This bull market has begun to act like one.
The indexes have cruised to new highs with low volatility and only shallow, fleeting dips. Riskier companies in tune with global growth have been market leaders – replacing the dividend cash cows favored a year ago. Smaller investors have belatedly started pouring cash into stock funds. We’ve even had a few trendy companies complete IPOs in the past month, with crackling first-day gains.
A headlong rush of corporate mergers and acquisitions would round out this picture of a late-cycle, high-metabolism market. And the conditions are firmly in place to see M&A surge as the year goes on.
While deal activity has been fairly busy the past few years – with global volume exceeding $4 trillion in 2016 for the first time since 2007 – it’s nowhere near as frenzied as one would expect at this point given the level of stock prices or length of the economic expansion.
Global M&A volume last year relative to worldwide gross domestic product or worldwide equity market value was a bit over 5 percent in 2016. That’s below the long-term average, about half the level of the frenzied deal-making peak of the year 2000, and substantially below the somewhat less wild M&A crescendo in 2007.
CEO spirits are high, as well – another key ingredient of corporate coupling. The Business Roundtable’s CEO confidence gauge, reported last week, rose more last quarter than in any period since the end of the Great Recession.
Financing conditions are profoundly favorable, too, with still-low government-debt rates but, more importantly, very low risk spreads on corporate debt and a pliant market for newly issued corporate paper.
The recent upturn in global economic activity should arguably have executives and boards thinking about playing more offense than defense.
Importantly, too, the market in recent years has looked kindly on companies that make acquisitions. Analysis by Credit Suisse shows that the average one-day gain in an acquirer’s share price last year was nearly 4 percent, and has been far better than the long-term average response during this entire M&A cycle, which the bank views as having started in 2014. This could partly be because the average premium paid has been below that of prior cycles, too – suggesting perhaps that middling deal volumes and upbeat investor reception are partly a matter of more disciplined acquirers.
Putting several of these factors together, analyst Jeffrey Harte of Sandler O’Neill Partners says, “We believe we can make a relatively conservative case for double-digit annual volume growth in 2017 and 2018.”