There has been a rebound and you might be wondering, in the middle of a pandemic, how could M&A volumes surge again?
Well, surge, they have. There are several reasons.
First, according to Goldman Sachs analysts, global deal volumes fell 51% year-over-year in the first of of the year because when the economy is seemingly in a bottomless pit and it feels like the sky is falling, no price is worth paying for a company.
In July and August, deal volumes increased 7% and 8%, respectively.
One driver is low interest rates. The pandemic did indeed bring about lower rates needed to stimulate the economy. As confidence in the economic recovery picked up and the cost of borrowing against an acquisition fell drastically, M&A picked up. Stocks have risen fiercely against mounting concerns about a slowing economic recovery and Goldman does indeed see more M&A declines on the horizon.
Another driver of the activity has been companies trading at bargains. Many oil and industrial companies filed for bankruptcy, creating an attractive buying opportunity for larger companies with strong balance sheet, especially as those companies look to take market share in an uncertain environment.
Returns on equity investments are incredibly uncertain and private equity firms, which are looking for gains on their capital within a few years, have been less aggressive, Goldman says. The buying activity has been lead by corporate strategic buyers looking for M&A to serve as a business solution.
Another driver of the deal activity has been evolution of industries, especially in growth tech areas.
Food delivery adoption got hot during the stay-at-home environment and after GrubHub was sold to JustEat Takeaway, Uber (UBER) – Get Report responded, in a play for more market share, by acquiring Postmates.
Cloud and data center spend is accelerated in the work-from-home environment and Nvidia (NVDA) – Get Report founder and CEO Jensen Huang sees enough of a technological change to the way data center chips are made, that he successfully sought for Nvidia to put up $40 billion for Arm Holdings, a British chip maker with currently low exposure, but promising prospects, in the data center business.
The point: Be aware of any companies you hold that might seek to acquire or be acquired.