According to a recent report from McKinsey & Company, 2014 was a very good year for M&A activity in general and especially for large M&A deals. Report authors André Annema, Roerich Bansal, and Andy West note more than 7,500 deals were made official last year, with the total value of the deals surpassing $3.5 trillion. Annema and colleagues point out that represents 7% more total deals and over 25% higher dollar value relative to 2013.

Large M&A deals return in 2014

M&A Deals

The McKinsey report highlights that close to 35% of the total value of deals announced in 2014 was from large deals, with more than 90% of the big deals being large deals by corporate acquirers, particularly in the healthcare, technology, media, and telecommunications sectors. The analysts point out it’s rare to see so many big deals as large-deal M&A strategies are higher risk and create less value than typical M&A.

M&A Deals

The main reason for all the big deals seems to be investor optimism. Annema et al. note that the “average announcement effects have never shown investors to be as optimistic about large deals as they have been in the past few years.”

Reasons for recent big deals

M&A Deals

The report also suggest a few other reasons for so many large M&A deals in 2014. For starters, “it could be that performance differences among companies hold the promise of significant economies of scale through M&A. As differences in earnings grow, deals will look more affordable.”

Perhaps investors are just happy to see companies doing something productive with their large cash reserves. Cash among the top 1,000 U.S. firms topped $1.5 trillion by the end of 2013, and over time pressure has built to put that money to work. Close to half of the excess cash companies are piling up is found in the healthcare and technology, media, and telecommunications sectors, not coincidentally the sectors that had the most large deals in 2014.

For many companies, it could mean that investors are just relieved to see them doing something with their sizable reserves. Excess cash among the top 1,000 US companies approached $1.5 trillion by the end of 2013, creating real pressure to put money to work. Among the top 1,000 listed companies in the United States, about half of that cash appears to reside in the healthcare and technology, media, and telecommunications sectors—the sectors announcing most of the large deals in 2014.

Finally, Annema and colleagues advance the possibility that the bump up in overall M&A activity and portfolio reallocation is in itself creating value. They note: “McKinsey research has shown that companies with a high rate of capital reallocation over a longer period of time tend to outperform in shareholder returns. Even with the currently high volume of very large deals, the share of divestments in total deal volume remains above average, implying that large portfolio moves are happening as well.”