In the last 100-odd years, there have been six waves of rapid merger activity in the U.S. At the turn of the 20th century, horizontal mergers, which united companies in the same industry (such as steel or oil) and formed monopolies, were common. Another wave, this one in the 1960s, saw companies trying to diversify, with mergers that created conglomerates such as General Electric, which had businesses ranging from manufacturing equipment, to television, and even financial services. In the 1990s, deregulation and globalization led to another wave, one that was heavily concentrated in the banking and telecommunications industries.
Many people now think the economy is squarely in the middle of a seventh wave. According to data from Thomson Reuters, 2015 is set to be the biggest year ever (once the planned deals close) in worldwide dealmaking, with $4.7 trillion in announced mergers and acquisitions—up 42 percent from 2014, and beating the previous record of $4.4 trillion in 2007.
The year stands out, not just for the total value of the deals but for the number of so-called mega-deals, which refers to any deal that exceeds $5 billion. Just in the last three months, notable mega-deals include AB Inbev’s acquisition of SABMiller, creating a $104 billion beverage company; Pfizer and Allergan’s announced a $160 billion merger; and the chemical companies DuPont and Dow Chemical Company’s plans to unite as a $130 billion company. Thomson Reuters counted 137 mega-deals last year, which accounted for 52 percent of the year’s overall M&A value.
“Mega-deals point to an incredible amount of confidence that has crept back into the corporate sector,” says Sriram Prakash, the head of Deloitte’s M&A Insights team. Dealmaking activity took a dive during the recession, but once signs of the recovery began to emerge, says Prakash, executives’ appetite for M&A came back full swing.
Companies may be more confident, but what, specifically, led so many of them to be so active last year? Deal-making has been pronounced in the sectors of health care, technology, consumer products, and retail—industries where experts say companies are looking to consolidate in order to become more competitive. The justification for M&A is usually the combination of reduced costs of doing business and increased revenue from greater market share. In the case of Pfizer and Allergan, for instance, it’s widely thought that the deal was designed to lower the combined company’s corporate-tax burden by relocating its headquarters to Dublin.
Another cause of M&A activity in 2015 was the relative robustness of corporations’ cash reserves. “Interest rates are at historic lows ... companies had lots of capital available to them to borrow to engage in deals,” says Robert Salomon, an associate professor of management at New York University’s Stern School of Business. “The second factor that you can’t ignore is that corporate balance sheets have a lot more cash: The amount of cash on them [is] at an all-time high.” U.S. corporations have been holding onto cash in record amounts, a phenomenon economists have attributed to the way the U.S. corporate tax system is set up. Salomon says that when demand for their goods and services remains tepid (as it has in many sectors) companies are often more motivated to grow through mergers and acquisitions, rather than organically—by making capital investments.
Will the pace of mergers and acquisitions keep up in the year ahead? Unsurprisingly, the bankers and lawyers facilitating deal-making (Goldman Sachs was the winning bank in 2015, advising—and collecting fees on—$1.8 trillion worth of deals) say that they believe that 2016 will continue to be busy. Prakash, however, says that this rate of M&A might be hard to sustain with interest rates rising, and notes that M&A activity in the U.S. usually slows down in election years.
There is also the question of regulation. The year saw many mergers announced, but many of them went into the thick backlog of deals still pending regulatory approval. In December, for example, the FTC moved to block a proposed $6.3 billion deal between the office-supply giants Staples and Office Depot. Some believe that such deal-blocking might signal a shift in the regulatory environment, with the government’s antitrust lawyers getting more aggressive, which would affect M&A activity in 2016.
The biggest question, though, is what these deals will bring about years from now. There is reason to believe that they are not all that constructive: Deal-making can be a lot more complicated than executives predict, and studies say that 70 to 90 percent of the time, mergers fail to meet the long-run financial goals they were drawn up to fulfill.