Positioning for the Next Wave in M&A
Welcome to the 11th edition of IMAP's flagship publication, Creating Value, as always, full of up-to-date case studies, commentary, and trending topics relevant to M&A markets, all contributed by our IMAP partners around the globe.
This issue’s theme is “The Next Wave in M&A”. And what a wave it is! In fact, I think that we were lucky to get so many contributions from our partners, considering the level of M&A activity that we are seeing in almost all markets. We are well into the second year of the coronavirus pandemic and contrary to all expectations our partners around the world are busier than ever. In fact, some say this is the best market they have seen in 10 years!
So, what is driving this wave, and how long can we expect it to continue? Some of it is due to the expected snap back from the depths of a year ago, pent up supply and demand, in other words, clearing the backlog, but this is only part of the story. The volume of money, M2, in the United States has risen by almost a third since January 2020, from $15.4 trillion to $20.4 trillion in May 20211 – meaning a 32% rise in just under 18 months!
This money is driving stock markets to new highs day after day, but is also pouring into M&A deals, IPOs, stock buybacks, real estate, and other hard assets, as well as commodities. WTI Oil is at $74 as I write this, nearly double what it was last November. And, naturally, commodity price increases are working their way through the economy in the form of inflation – Bloomberg consensus estimates expect year-on-year inflation for the second quarter to come in at 4.3%, double the Federal Reserve’s target, and it is expected to be “sticky” in the high 3% levels through the beginning of next year.
Again, some of this is being caused by supply chain back-ups because of the pandemic, but years of under investment have caught up with many firms, which, again, is an M&A driver. The big debate now is whether this inflation is transitory or will remain at a permanently high level. We will see.
If you have been trying to buy a new or used car, you know that used car prices are through the roof, while waiting times for new cars are stretched due to chip shortages. I don’t want to delve too much into this issue, which is down to supply imbalances, the huge demand for new gaming chips, the surprisingly quick recovery of the Auto industry, etc.
But it should be noted that about 65% of the world’s chip-making capacity is based in Taiwan, which is suffering one of the worst droughts in recent history, and chip making uses a lot of water. Now, besides the nightmare of potential US-China posturing over Taiwan threatening our supply of chips, it seems that the effects of global warming could be just as serious a threat.
Admittedly, this is a sneaky way to segue into a consideration of ESG investing, but recently we have seen major investors getting serious about Environment, Social and Governance (ESG), and this is a trend that is likely to become more and more important, and to come much faster than we anticipate. As we know, most of the time change comes slowly, and then, suddenly.
Throughout his new book on climate change, ‘How to Avoid a Climate Disaster’ (2.) , Bill Gates refers to the figure of 51 billion - the number of tons of greenhouse gases the world adds to the atmosphere each year and proposes ways that we can (and must) bring that number down to zero. At IMAP we intend to be in the vanguard of understanding and developing ESG deal capabilities and opportunities and will be taking up that challenge in upcoming panels, conferences, and publications.
Paddling for the Peak
So, going back to my original question - how long can we expect this M&A wave to continue? The answer is – I have no idea! The financial press is full of talking heads trying to answer that and related questions, but there are a couple of things I have learned about economic predictions: 1. you shouldn’t make too many of them, and 2. you shouldn’t take too much notice when other people make them.
I remember seeing a couple of books at an airport around 10 years ago, one calling for spectacular stock market gains (those predictions are coming true), the other predicting the bankruptcy of America, which hasn’t come true yet, although we are seeing more and more dire assessments. (3.)
The point is that there are books and analyses that cater to whichever way you happen to be feeling, each with charts and graphs that support what you know must be true. A great analysis of how narratives drive decision making is the most recent work by Nobel prize winning economist, Robert Shiller, “Narrative Economics” (4.), which describes many of the narratives that drive economic booms and busts.
That is not to say that narratives are true or false, but to emphasize the importance of recognizing them and understanding when to get off the wave. The otherwise great American economist, Irving Fisher, will be forever known for his prediction just nine days before the 1929 stock market crash, that stock prices had “reached what looks like a permanently high plateau.”
History Never Repeats Itself, but It Often Rhymes
So, what to do? Should we ignore macro economic trends and hope for the best? Not at all. The world around us is constantly changing, and our views should change along with our inputs - what’s important is not to have a prediction, but to have a system.
Our system in IMAP is to constantly monitor the activities of our 250 senior dealmakers in 43 countries – transactions, mandates, pipeline – to discover trends, share information, anticipate sector booms and slowdowns, without getting tricked into making or following gut feel predictions or following and being stuck in a narrative.
If you want to understand the nature of markets, the importance of having a systemic view and realizing that most of what we “know” about financial markets is wrong, there can be no better introduction than that by the French-Polish mathematician Benoit Mandelbrot, who died in 2010. In his classic “The Misbehavior of Markets” (5.) Mandelbrot describes how with time each market becomes a fractal of itself.
In simplistic terms, in a quote attributed to Mark Twain, “History never repeats itself, but it often rhymes”. So, at IMAP we are constantly looking for connections and reading the signals, taking each day as it comes and hoping to be prepared for whatever the markets and our clients throw at us next, hoping, as Warren Buffet warned, to not be caught naked when the tide goes out.
Have a great summer!
<< click here to read and download Creating Value 11 >>
1. Federal Reserve Bank of St. Louis, Research Division, https://fred.stlouisfed.org/series/M2SL
2. Bill Gates, “How to Avoid a Climate Disaster”, Penguin Random House, 2021
3. See, for example, James Rickards, “The New Great Depression: Winners and Losers in a Post-Pandemic World”, Portfolio, 2021
4. Robert J. Shiller, “Narrative Economics: How Stories Go Viral and Drive Major Economic Events”, Princeton University Press, 2019
5. Benoit B. Mandelbrot and Richard L. Hudson, “The Misbehavior of Markets: A Fractal View of Risk, Ruin and Reward”, Basic Books, 2004