Which came first, the chicken or the egg? Wait, let me try that again with an M&A focus—which comes first, sky-rocketing equity markets or rapid growth in mega-deals? On second thought, let’s stick to some analysis for now.
Since 1998, the relationship between U.S. M&A deal volume and the S&P 500 had moved almost in lock-step, until 2013, when a decoupling of the relationship started to appear. Using 1998 as the base year, the correlation between the S&P 500 and U.S. M&A deal volume was a respectable 0.72 (going back to 1992 the correlation is even higher at 0.93). From 2013 onwards, however, the correlation was just 0.20, moving towards non-existent today. That divergence presents challenges for the broader M&A market, or rather that divergence is a symptom of some of the challenges facing dealmakers (apologies for another “chicken and egg” reference, it’s a correlation-not-causation thing).
M&A in 2018
But divergence isn’t the full story here. Though the broader M&A market may have issues, 2018 is proving that the top-end of the market is anything but challenging. As a percentage of overall deals, transactions valued over $1 billion are at an all-time high. In absolute terms, the first half of 2018 has reported the second-highest level of deals valued over $1 billion with 200 deals; the highest level being the first-half of 2007 with 210 deals. Also worth noting is that the streak of billion-dollar deals started in 2013, and since then there have been over 100 billion-dollar deals in each half-year. Even in the run-up to the financial crisis the streak was only three years (2005 to 2007). And to help complete the pattern, the dot-com boom had a similar three-year streak of 100 billion-dollar deals in each half-year from 1998 to 2000.
As for the riddle, that’s easy—easy money—more formally known as quantitative easing and the subsequent taper tantrums that follow.
I realize that QE started prior to 2013, as an extreme solution to the global financial crisis. However, once the financial system stabilized (and easy money kept flowing), it subsequently led to the decoupling of the S&P 500 with M&A and the growth in equity markets that have driven up deal values and fueled a billion-dollar buying spree that we haven’t seen since... well, before the global financial crisis.
With that said, in the first half of 2018, the question remains; which came first?
Bryan joined FactSet in 2003 and is based in London. Bryan brings deep and varied experience in corporate strategy, management, financial services, international development, and enterprise content management to FactSet. As Director of FactSet M&A, Bryan develops FactSet's global M&A and corporate governance research, and works with private equity research and debt research teams to provide complete in-depth analysis to FactSet clients.