Mergers and Acquisitions – A Pathway to Growth

Since the credit crisis M&A activity has been fairly low as companies aimed to strengthen their balance sheets and reduce debt levels.  Over the past five years, this global restructuring has meant these companies are in some respects the strongest they have ever been.

The start of this year has seen a rapid increase in M&A activity as companies utilize high levels of cash to expand.  Such companies as Dell and private equity firm Silver Lake Partners agreeing a leveraged buyout to take the company private.  Virgin Media, also agreed a takeover by Liberty Global for $23.3bn, and Warren Buffet’s Berkshire Capital acquired Heinz for $23bn to take it private.  

Larger companies have historically had no problem in achieving good year on year growth, however markets have now changed and in many countries growth is anaemic.  The changing demographics weigh on government spending and will inadvertently reduce expansion and demand for many businesses for years to come.  A possible area for companies to expand are to takeover business which are in the growth phase, allowing larger companies to capitalise on growth elsewhere without having to expand existing operations.  

So why now, what has caused this activity to pick so much since last year? Markets have calmed significantly and volatility has been gradually decreasing.  There is a slight correlation between M&A and volatility and this is inherent in the great start we have had this year.

There are a number of factors which are helping company mergers and acquisitions.  Interest rates are at historic lows, and yields on even the highest yielding debt are the lowest it has ever been.  For M&A particularly this is a good thing, companies can borrow large sums of money for a leveraged buy out. 

As the larger companies try not to stagnate, we may see a lot of their small competitors prime for the taking and a number of funds could benefit from this.  Mainly funds in the mid cap space will be best placed to see takeover bids as they have a more consistent growth rate.  Funds such as Schroder U.S Mid Cap and Royal London UK Equity Income could do well from this over the next few years.