3 factors behind the predicted M&A explosion

In a recent quarterly letter to clients, Jeremy Grantham, co-founder of global investment management firm GMO, discussed his view regarding an imminent boom in the global M&A market.

With many experts of the opinion that the industry is already experiencing a boom, Mr Grantham suggested whilst a large number of deals have been done, it is nothing compared to the volume expected in the near future, stating: “Don’t tell me there are already a lot of deals, I am talking about a veritable explosion, to levels never seen before.”

There are three underlying reasons for Mr Grantham’s buoyant prediction for the M&A industry, specifically:

  • Cheap debt: the current cost of debt is much lower than in other M&A boom periods. Many people do not realise the majority of acquisitions require some level of external financing; as such, at present, the cost of making an acquisition is lower than in previous times, enticing more organisations to pursue growth through acquisition.
  • High profit margins: despite a universally slow Q1 2014, profit margins remain high and are widely expected to stay there. This is fuelling confidence, which, in turn, is encouraging organisations to accelerate growth strategies.
  • Young economic recovery: whilst being in the sixth year of economic recovery, the recovery itself is, in many ways, still appears fairly young. With the economic climate set for many years of growth, and with confidence continuing to improve, M&A activity will only increase.

Mr Grantham’s comments that investors are only now summoning the courage to seriously commit to acquisition growth strategies bode well when considering that competition for acquisitions has been strong since early to mid-2013.

Ever increasing interest from acquirers and a higher frequency of deal completions are two characteristics which have characterised our year at Benchmark International. Records relating to deal values and total deals achieved are already close to being broken, with over two full months remaining until Christmas.

With the economy set to grow for the next couple of years, entering the market now could prove key to business owners looking to capitalise on demand that sees deal values boosted significantly.

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