Merger and acquisition activity (M&A) among North American non-financial companies is expected to accelerate in the year ahead, according to Moody’s Investors Service.
In a new report, the rating agency says that it expects a pick up in M&A as companies look to take advantage of favourable credit conditions before the end of the U.S. Federal Reserve’s quantitative easing (QE) policy. “With financing conditions still favourable for now at least, companies choosing M&A activity to accelerate their growth will move to act before market conditions potentially change,” says Bill Wolfe, senior vice president at Moody’s and author of the report.
Moody’s notes that while interest rates may be largely unchanged as the Fed pulls back on QE, “the supply of inexpensive money will gradually decrease, and investors are likely to become more selective in their investments.”
The implications of this increased selectivity are difficult to predict, Moody’s says, but it suggests that, “Lower-rated issuers with weak growth prospects will be the most motivated to pursue M&A, as the companies most vulnerable to lower growth and increased investor selectivity as QE ends.”
The report also says that companies may look to M&A to bolster growth, given that economic conditions may not be robust enough to power growth organically. “Investment-grade companies will pursue M&A deals by strategy, while many speculative-grade companies will be motivated by necessity,” says Wolfe.
Moody’s expects most speculative-grade M&A activity to involve U.S. companies, as there are higher concentrations of low-rated issuers in the U.S., compared with Canada, Latin America, and the Caribbean.