Which Way M&A?

There’s some confusion around about the direction of the M&A market, and it comes from seeing the market as an undifferentiated whole. For example, a recent article in the New York Sun predicts a comeback in M&A activity after a year in the doldrums. 

The article is generally correct and I do see a strong emanating market. However I question their premise that the comeback is widespread over the whole market. There’s going to be a divide. At the high end — which I characterize as transactions of $10B and up — we’ll continue to see a healthy amount of activity. It’s Hewlett Packard buying EDS. It’s Anheuser-Busch getting bought by Inbev. It’s Microsoft trying to buy Yahoo.  Many of those big companies recognize that they will only continue to grow by adding strategic components to their business. They’re looking to get immediate expansion in either brands or — even more important — global penetration, which is partly what we saw on the Inbev deal. 

The other area where we will see continued growth is at the lower end of the market. These are transactions under $1B in size. Here people are trying to fill their market gaps, buying competitors that have gotten weaker. In particular within that sector, watch for transactions under $100m  — I predict the strongest activity within this range. The primary reason is their access to credit, or perhaps more significantly their ability to do without it.  In many cases privately held companies of this size can buy for cash out of their operating income. Or they can use equity positions they’re going to put into the business. Either way, the transactions are proving much easier to get financed.

So this is what I see as the major divide — greater than $10B, less than a billion. In my next post I’ll talk about the missing middle: transactions from $1B to $10B.