Where have all the deals gone?

Transaction volume shave slumped since the financial crisis and have not recovered despite the booming financial markets and imporving credit availability.

If we look at historical datasets, there is a strong correlation between M&A volumes on one hand and stock prices and short term interest rates on the other, the latter are acting as a proxy for credit market conditions. The two analysed together give us r-squareds of 0.8 to 0.9 for the UK over the last 10-15 years. The correlation is much stronger than for GDP for example. Copies of our regressions are available if of interest.

 At the global level a 10% move in the MSCI has historically coincided with a 4% increase in deal volumes. Corporates buy when confidence is high and their stock is doing well. Credit conditions influence corporates but are more strongly correlated with PE activity. A 100 basis points move in interest rates correlates with a 1% change in activity.

 The variables are interrelated and we were able to develop almost as strong predictive relationships with national stock market data. Since 2009 all the models have broken down and at some points other factors such as gold have had better correlations. As of today we believe that the gap we see between deal volumes and the indices is 25-30%. The two drivers in our view are:

 

–        Confidence, the relationship between confidence and activity has weakened and business now needs to be more confident to act (see “The Confidence Paradox” my blog of 2 weeks ago)

–        Values, values are now at too high a level relative to the underlying economics of businesses for buyers and sellers to meet on price. Rising stock market values drive activity but only up to certain limits and we appear to be beyond these.

 

 

Table 1. US M&A activity (deals per quarter) against US Stock Market index

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Table 2. UK M&A activity (deals per quarter) against UK Stock Market index

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