Stocks generally, and the TSX in particular, may be bolstered by a rising tide of merger and acquisition activity in the year ahead, suggests CIBC World Markets.
In a new report, CIBC looks at the prospects for M&A activity to ramp up, providing some support for equities. It notes that global deal volumes climbed to over $2.2 trillion in 2013. While this is still far below the pre-recession high of $4 trillion, and Canadian deal volumes actually fell last year, it reports that activity is on the upswing this year. The report says that global deal volumes are up 50% so far in 2014. “North America appears to be leading that advance, thanks to its more advanced recovery and reduced uncertainty due to developments like the recent U.S. budget pact,” it says; noting that Canadian deals are up by roughly 30% so far this year on a year-to-date basis.
“The most notable shift in the Canadian deal landscape has been the growing share of communications deals,” it says, adding that activity in other sectors is rising too, including energy, mining, real estate, pharmaceuticals and travel/accommodation.
The report notes that the current market environment shares features with previous episodes of strong M&A activity, including sector-specific shocks that make mergers attractive options for redeploying capital. “Shocks promoting such realignments today include financial sector re-regulation, post-recession consolidation pressures, and patent roll offs in the drug industry,” it says.
High corporate cash levels support deal activity too, it says. “With profits outstripping GDP growth, in many countries, holdings of cash and other liquid assets by publicly listed G7 firms have ballooned by 60% since the recession’s end, to over $4 trillion, giving firms an unprecedented M&A war chest,” it says, noting that high cash levels in the equipment, IT, energy, auto, health and pharmaceutical segments “make them a focal point for dealmaking.”
Additionally, with little in the way of cost cutting available, U.S. firms are exploring more options to drive top-line growth, it says. In terms of specific sectors, stagnating oil production by the largest U.S. firms is pressuring them to seek growth by acquiring producer assets, it says. “Mining deals are showing some signs of a turnaround, and consolidation pressures there are likely to continue,” it notes, and, “Pressures for new revenue streams and cost savings in drug pipelines will continue to drive deal flow in the pharmaceutical sector.”
The report says that the last round of heavy deal activity for Canadian resource firms added as much as 7% to the market cap of the TSX. “Even if the activity this time doesn’t reach quite the same feverish pitch, a pick-up in buyout activity is another potential source of market support,” it says. “That’s one of several reasons for thinking the TSX could fare better this year after finishing well back in the G7 pack in 2013.”