2017 on track for record M&A

An all-time record in worldwide mergers and acquisitions (M&A) was set in 2015: $5.7 trillion.

Over time as markets gets bigger, so does deal size, observes Craig Basinger, CFA and chief investment officer at Richardson GMP, in a blog post.

Read: More M&A deals expected

A Mergermarket trend report says Canadian M&A in 2017 aligns with a global trend of higher valuations for fewer deals, compared to last year. For Q1 2017, there were 111 deals totaling US$35.8 billion, which is a 109.5% increase in value through 40 fewer deals than Q1 2016 (151 deals, US$17.1 billion). The top sector is EMU: energy, mining and utilities.

Basinger also notes that deal activity tends to peak late in bull markets.

“This isn’t too surprising,” he says, “given late in a bull market, you typically see more greed than fear.”

Overall last year, M&A activity dropped 12% compared to 2015’s record. And, with fewer deals so far this year, is the bull market cycle about to end?

Basinger says the drop in activity isn’t significant, and is associated with a drop in investment in the energy sector. Further, deals announced so far in 2017 total $1.9 trillion. “If this pace continued for the rest of the year,” he says, “we would finish at a new record of $6.7 trillion.”

For February 2017, StatsCan data show net foreign purchases of Canadian securities at a record high of $32.5 billion, driven by a $35-billlion inflow. That, in turn, was driven by one M&A deal worth $42 billion, notes Stéfane Marion, chief economist and strategist at National Bank, in an industry note. (Enbridge acquired Spectra in an all-stock buyout. Because of the deal, Marion points out that demand for Canadian securities and its impact on currency is thus better captured by looking at foreign purchases of Canadian bonds.)

Investing tips

Keeping M&A activity robust this year are earnings growth, sales growth and CEO confidence, says Basinger. Plus, financing those deals is attractive, with bonds priced at historically low spreads over treasuries and the equity market accommodative for raising capital. “IPOs and secondary issuance is up 13% from last year,” he says.

Financials are positioned to benefit from higher M&A activity, especially those with large investment banking and advisory divisions, says Basinger. He also points out that the market benefits generally if CEOs become overconfident and overpay for assets.

Still, don’t forget that record M&A activity could signify the end of a bull market. “The end may not be nigh,” says Basinger, “but it is getting closer.”

Read Basinger’s full blog post here. Read the Mergermarket report, which lists deals for Q1 2017, here.

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