A number of prominent financial analysts and research firms, including Citi Research, have been predicting significantly increased mergers and acquisitions (M&A) activity in the market for some time. So far, however, their predictions have not really come true.

Recent M&A statistics

2013 did see a slight uptick in the total number of deals greater than $500 million, from around 700 deals in 2012 to more than 850 deals closed in 2013. The average deal amount also increased slightly to just under $2.5 billion, up from around $2.3 billion in 2012. The most notable deal of 2013 was Verizon Communications Inc. (NYSE:VZ) inking a $130 billion transaction with Vodafone Group Plc (ADR) (NASDAQ:VOD) (LON:VOD). The 2013 M&A figures, however, are barely above the 2011 numbers, and still well below the 1250 deals averaging over $3 billion each in 2007.

M&A deals

Five factors favoring M&A

Citi Research’s recent report titled “2014 Investment Themes” lays out five reasons to expect more M&A activity in 2014, and then proceeds to point out why each reason is either counterbalanced or temporarily irrelevant.

Financing is cheap and available — No one can deny that financing today is cheap, but the Citi analysts point out it is not always as “available” as you might expect, especially for deals perceived as risky. The analysts also cite treasury rate volatility as a fly in the ointment and a potential limiting factor to taking on the risk involved in big, blockbuster deals.

Valuations are attractive — The Citi reports highlights the fact that valuations in many sectors are still relatively attractive, but that none are anywhere near as attractive as they were two years ago. Their argument is that if the deals didn’t get done at the valuations of two years ago, they’re not very likely to get done at today’s dramatically increased valuations.

Macro-economic environment is good for M&A — “Yes, it does, but that doesn’t mean M&A will come. If we compare the average monthly M&A deal volume versus the S&P 500 (INDEXSP:.INX) and the six month rolling VOLATILITY S&P 500 (INDEXCBOE:VIX), we can see that there is a strong relationship between changes inthe equity markets and M&A volumes.”

Shareholder activism to put large company cash hordes to work — The Citi analysts highlight the fact that companies do have a lot of cash on hand right now, but point out that shareholder activists today are more likely to urge management to do a share buyback than to make a potentially risky acquisition.

Executives are willing to lever up — “Yes — more willing– but still cautious. The economic outlook is the overwhelming issue as to why the M&A environment hasn’t take off as expected. Executive confidence in the strength of the recovery in the U.S. and Europe certainly gives many CEOs pause when considering major deals — there is just too much at risk. To this end, it is much easier to appease shareholders with share buybacks or increase.”