Since the onset of the Financial Crisis we have been told not to expect a return to the pre-Lehman Bankruptcy days that had provided a constant flow of transactional corporate activity. Rather, the legal community was to downsize and forever look back on the "good 'ole days" of M&A, IPOs and other sophisticated transactions. Transactions, and transactional lawyers with them, were now to be victims of the so-called "new normal".
And for much of the past six years that in fact appeared to be our fate. While there would be short periods of significant M&A and other transactional activity, these bursts of activity ended almost as unexpectedly as they had begun. In effect, these spurts of activity seemed to be the veritable exceptions that proved the seemingly irrevocable rule. Early every January we would hear the financial and legal dealmaking pundits, I among them I must confess, express the view with great conviction that this was the year -- THE YEAR -- when M&A markets would indeed return. Sadly, even before the end of the first quarter in most cases, it was clear that whatever "green shoots" there might have been in January, the malaise would continue and the New Normal would prevail. Well, not this year!
Yes, 2014 is THE YEAR, 2014 is different. In fact, activity levels actually began to pick up in the second half of 2013. What at first most thought was yet another short burst of significant activity that would end without warning, continued through year end and by early Spring of 2014 it was clear that the lawyers listed in this section would be very busy indeed. Weekends in the office and cancelled vacations -- every deal lawyers' dreaded desire -- would be commonplace again in 2014, and possibly for several years to come.
So let's take a step back and consider what happened in 2013 that put deal lawyers' early retirement plans on hold. In reality, many of the dynamics that have led to strong deal flow over the course of the last year have actually been firmly in place for the last several years. Companies responded to the Lehman Bankruptcy, and the resultant credit crunch, by quickly cutting costs in order to maintain free cash flow. Cost cutting increased as the global economy contracted; in essence profits were maintained, and in many instances increased, by cutting expenses since increasing revenues was impossible. In a no or low growth environment, companies have had a strategic imperative to do deals. To the extent that there is no organic growth, then inorganic growth -- acquisitions – become imperative to fuel increases in both revenue and earnings. Not only did the largest global companies have the need to make acquisitions, they also had the cash and, if they needed more cash, they could borrow additional cash at record low rates and on historically attractive terms. What many companies did not have until late last year though was the requisite business confidence that the economy would grow -- or at least not go back into recession -- sufficiently to make it clear that an acquisition was the right decision for today, as well as the long term future of the company.
With business confidence rising, strategic buyers today have the "means, motive and opportunity" to do deals large and small. Through the middle of August, more than U.S. $2 trillion of deals have been announced globally. In the first half of 2014, aggregate deal value was 44% greater than the first half of 2013, for the best first half since 2007. Clearly "Merger Monday" is back.
What is striking about current activity levels is the depth and breadth of the dealmaking. This has not been a one-size fits all merger boom. Activist investors have prompted deals at the same time as the US Tax Code has led to numerous inversion transactions. As a consequence, cross-border deals and hostile deals are hallmarks of the current wave of transactions. In short, this M&A market has broad shoulders and sharp elbows.
Despite the high level of M&A activity, prospective buyers are continuing to be cautious. Boards and managements are much more deliberate than they were in prior M&A booms. So deal activity is likely to continue for some time to come, but the lessons learned from the early 2000s will likely keep a measure of moderation in place that will guard insure a steady stream of good deals for some years to come.