Cor­po­rate deals ap­petite hits 5-year high thanks to a strong US dollar


The cur­rent wave of cor­po­rate takeovers and merg­ers is set to grow, with the ap­petite for deals among ex­ec­u­tives hit­ting a five-year high thanks to a strong U.S. dollar and low oil prices, a global sur­vey found Mon­day.

A strik­ing 56 per­cent of com­pa­nies as­sessed say they in­tend to make ac­qui­si­tions in the com­ing year, up from 40 per­cent in Oc­to­ber, con­sult­ing firm EY said in its half-yearly re­port on cor­po­rate deal-mak­ing. That’s the first time since 2010 that more than half of ex­ec­u­tives say they plan to make an ac­qui­si­tion in the next 12 months.

And the num­ber of deals in the pipe­line, EY noted, is up 19 per­cent from a year ago.

“2015 will see a surge of new en­trants and com­pa­nies re­turn­ing to the M&A mar­ket to gen­er­ate fu­ture growth,” said Pip McCrostie, EY’s global head of merg­ers and ac­qui­si­tions, or M&A.

Al­ready in the first three months of 2015 the value of global merg­ers and ac­qui­si­tions hit US$888 bil­lion, the high­est level for the pe­riod in at least five years, ac­cord­ing to data provider Dealogic. The sec­ond quar­ter ap­pears to have started strongly with en­ergy com­pany Shell agree­ing to take over the United King­dom’s BG Group for US$70 bil­lion, in what is the ninth largest M&A deal ever.

The EY sur­vey iden­ti­fied the oil and gas in­dus­try as one sec­tor that is likely to see more ac­tiv­ity in the months ahead. When oil and gas prices are low, ex­plo­ration for new re­sources be­comes a riskier prospect, so en­ergy com­pa­nies tend to try to boost growth through ac­qui­si­tions.

But deals are be­ing struck across all sec­tors this year, in­clud­ing in tech­nol­ogy, phar­ma­ceu­ti­cals, health care and food, where Heinz re­cently said it will buy Kraft for US$45 bil­lion.

The ap­petite for deal-mak­ing has re­cov­ered over the past cou­ple of years from the lows recorded in the wake of the fi­nan­cial cri­sis of 2007-8 and the en­su­ing re­ces­sion, when com­pa­nies pulled back on risky in­vest­ments and sought to rebuild their fi­nances. That in­volved pay­ing down debts and re­build­ing cash re­serves. Po­ten­tially risky un­der­tak­ings such as M&A fell out of vogue and deal vol­umes and val­ues slid sharply.

One rea­son for con­fi­dence in the out­look for the year ahead is the dollar’s strength. The dollar has hit mul­ti­year highs against a range of cur­ren­cies as the strength of the U.S. econ­omy has stoked ex­pec­ta­tions that the Fed­eral Re­serve will raise in­ter­est rates. The euro and the yen, by con­trast, have fallen as the cen­tral banks of the 19-coun­try eu­ro­zone and Ja­pan en­act loose and cheap mon­e­tary poli­cies to help their weak economies.

Though big shifts in the value of cur­ren­cies can be a chal­lenge to multi­na­tional com­pa­nies as they make plan­ning more dif­fi­cult, EY noted that com­pa­nies whose rev­enue is largely made in a cur­rency that has strength­ened — such as the dollar — have a com­pet­i­tive ad­van­tage in M&A. For ex­am­ple, eu­ro­zone com­pa­nies will look cheaper to firms that earn in dol­lars given that the euro has fallen about 20 per­cent against the U.S. cur­rency in the past year.

“For them, the price of as­sets in many parts of the world will have ef­fec­tively fallen and they are now tak­ing ad­van­tage of this com­pet­i­tive M&A ad­van­tage to eye po­ten­tial bar­gains in the mar­ket,” said McCrostie.

McCrostie said lower com­mod­ity prices will also foster M&A ac­tiv­ity among com­pa­nies that spend a lot on raw ma­te­ri­als, such as Euro­pean chem­i­cal firms, as they could have more money avail­able to in­vest.

EY’s sur­vey is based on in­ter­views with 1,600 se­nior ex­ec­u­tives from large com­pa­nies in 54 coun­tries and across in­dus­tries.

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