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M&A Activity Likely To Pick Up In 2014: Citi

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Citi Research released an investment report last week titled “Is the M&A freeze over?” The report suggests that a number of the factors holding back merger and acquisitions activities over the last couple of years are breaking down, and that it’s possible 2014 could be the most active year for M&A in quite a while.

Slow M&A market last few years

By historical standards, the last few years have seen relatively few M&A deals. Several analysts have commented this seems a bit odd given the low interest rate macro environment, but Citi analysts Jason Shoup, Sonam T. Pokwal and Swati Verma say it boils down to the fact that it’s been hard for companies to agree on a price for a sale.

“The simplest answer is that for the last few years it’s been rather challenging for buyers and sellers of companies to agree on price. That’s particularly true when the S&P 500 (INDEXSP:.INX) is up 46% in two years and global macro concerns simultaneously abound. Why should a potential seller part with their company for a 30% premium when their stock could be trading 30% higher in one year’s time along with the broader market? Alternatively, why should an acquirer purchase a company at a seemingly rich P/E when underlying growth remains restrained and political risk looms at home and abroad?”

12mo average takeover

M&A starting to pick up

The Citi analysts also argue the very busy first two months of the year is not just a temporary spike in deals but more of a sign of things to come. They highlight the $273 billion in deals already announced this year, and point out that deal total for January and February of 2014 is the largest for the first two months of the year since 2007. They also argue regulatory concerns are overblown and that when you put it all together, there’s a very good chance of a significant pick up in the M&A market this year.

“Add it all up and we think there’s a strong case to be made that as cyclical forces start to take hold of the economy, a pickup in M&A activity is likely to follow”

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