Should PE Professionals be Nervous When Looking at the Pace in Mergers and Acquisitions Volume?

In the mergers and acquisitions world (M&A), 2014 is off to an incredible start.  We’ve seen Valeant’s $46 billion proposal for Allergan (April 22).  About a month later, May 18, we saw AT&T acquire DirectTV .  On June 15, Medtronic acquired Covidien in a deal worth about $43 billion.  Earlier in the year we digested Comcast’s $45 billion move to buy Time Warner, a move slated to create the nation’s largest cable company.  These are, of course, only a few of the M&A announcements the market has experienced in a little over the first half of 2014.  So what does this activity look like in comparison to M&A deals over the last 10 years?

2004 to 2014 M&A Activity

Here’s a look at the total mergers and acquisitions deal volume over the past decade.

Amazingly, there’s already been $864 billion in M&A deals (as of publication) so far in 2014.  Annualizing the $864 billion comes out at almost $1.6 trillion.  Should $1.6 trillion in deal volume materialize, it would place 2014 M&A activity as the highest ever, surpassing the $1.57 trillion experienced in 2007 U.S. deal volume.

Should PE Professionals Be Worried?

Interestingly, M&A activity has not followed the typical recovery momentum.  Instead of consistent, steady growth in deal volume as there was from 2004 to the pre-housing recession of 2007, the current M&A business cycle recovery has been choppy. M&A activity bottomed in 2009 at around $753 billion, about half of 2014’s current pace.

Following bottoming in 2009, M&A activity barely budged in 2010, increasing to $795 billion or 6 percent.  After a mediocre 2010, M&A activity experienced a mini-jump in 2011, going from $795 billion to $964 billion – over 21 percent growth.

The 2011 jump was a jump that didn’t last.  M&A activity slumped in 2012, dropping slightly from $964 billion to $933 billion – down 3 percent. In 2013, M&A activity experienced moderate growth at 9 percent, going from $933 billion to $1.0 trillion.  Following that moderate growth, M&A growth into 2014 has been feverish so far.  Through the middle of July, M&A volume is at $864 billion, more than all volume in 2009 and 2010.  If the trend continues, M&A volume will end the year up almost 85 percent to $1.6 trillion.

So, should PE professionals be worried? If the global economy really is accelerating, then the answer is probably no.  Instead, if this view turns out to be correct, 2014 is just the beginning. Alternatively, if the global economy does not accelerate, the magnitude of the 2014 jump likely will not prove to be sustainable.

2014 – Just the Beginning?

Overall, the 2014 M&A volume may give PE professionals reason to pause and take an overall macro view of the world’s economies.  The incredible spike in 2014 may turn out to be just the beginning of strong activity as the economy regains steam.  Alternatively, the 2014 experience may be setting the stage for a disappointing 2015.