Record valuations drive 2015 M&A boom
Buyers paid record valuations for US takeover targets, as merger and acquisition activity soared to unprecedented levels in the first half of the year, surpassing the debt-fuelled run before the 2008 crisis.
A heady cocktail of ultra-low financing costs and a search for growth across sectors propelled US M&A activity up 60 per cent to $987.7bn, the strongest first half since records began in 1980.
Global M&A in turn rose 38 per cent compared with one year ago to $2.18tn in the first half, the highest since 2007, according to Thomson Reuters data.
The US deals are also marked by valuations that are testing new grounds. The average deal valuation — a key measure of how much buyers are willing to pay — rose to 16 times earnings before interest, taxes, depreciation and amortisation, beating the previous high of 14.3 times in 2007.
This year “feels like the last days of Pompeii: everyone is wondering when will the volcano erupt”, said one senior banker referring to the ancient Roman city buried by ash in the 79AD eruption of Mount Vesuvius. “Nobody knows. It feels like we still have some leeway but it won’t last for ever.”
Valuations have been highest in the tech sector, led by Avago’s $36.4bn acquisition of rival Broadcom, which was the largest tech deal since the dotcom bubble and valued the target at 20 times ebitda.
Bankers, lawyers and academics interviewed by the Financial Times said that the data indicated that prices on deals were becoming “a little frothy”, raising questions about the sustainability of the current boom.
Most bankers are convinced that the deal bonanza will go on for at least another year, as economic conditions remain favourable and investors are rewarding companies for purchases.
This year, shares of acquiring companies have gone up 66 per cent of the time after a deal has been announced, compared with less than half of the time in 2008.
Rising valuations, however, are likely to make it harder for companies to strike new deals, said Wilhelm Schulz, head of Europe, Middle East and Africa M&A at Citigroup. “The concerns of boardrooms have generally shifted away from macro issues to valuation when it comes to a deal,” he said.
Scott Moeller, head of the M&A research centre at London’s Cass Business School, said that it was too early to determine whether the markets were in a new asset bubble. But he added that the high valuations mixed with a growing number of hostile deals indicated that “we are moving into the direction of the 1998 and 2007 bubble”.
Fitch, the rating agency, recently said that the breakneck pace of M&A activity has increased the risk that US companies will borrow too much money or overstate the savings they can achieve from their deals.
Still, some analysts said that the current cycle was very different from the one that preceded the financial crisis. “The higher [valuation] multiple, by itself, is not an indicator of a bubble since Treasury bond rates have dropped since 2007,” said Aswath Damodaran, a finance professor at NYU Stern.