If there were a version of Time magazine's "person of the year" for investing in 2015, a yield curve might be on the cover. All we seem to hear about these days are interest rates nearing liftoff and that the window is closing to borrowing cheaply for mergers and acquisitions.
That's why it's interesting to see, amid a record year for dealmaking, that so many acquirers are opting to pay with stock instead of debt. About 18 percent of the transactions in 2015 were entirely stock, meaning no cash changed hands -- investors simply received a stake in one company for a stake in another. That's the highest proportion of stock deals since 2010. And with almost half of this year's M&A including some form of stock payment, all-cash (or debt) deals are at their lowest in more than decade.
Dow and DuPont are the latest example, announcing Friday an all-stock merger to create a $130 billion chemical behemoth, which they plan to later break into three separate companies. The transaction is structured so that investors get to swap each Dow share for a share in the new entity, to be called DowDuPont, while the exchange ratio for DuPont investors is 1.282 DowDuPont shares. This means the merged company's ownership base will be split 50-50 between the two sets of stockholders.
For Dow and DuPont, the rationale may go beyond financials. The companies seem to have wanted this to be a merger of equals, which means they needed to use stock. The case is similar for drugmakers Pfizer and Allergan, which are combining in the biggest deal of the year. Because that transaction is structured as a tax inversion, it requires a heavy stock component. But then there's just the sheer size of it, too -- even one of the world's biggest pharmaceutical companies can't just borrow $160 billion. (Both situations also had activist investors in the mix -- Nelson Peltz and Daniel Loeb at DowDuPont, Bill Ackman at Allergan).
Beyond those examples, though, a larger theme is at work. While the cash companies have hoarded since coming out of the recession has often been cited as a driving force of the merger mania, the stock market is equally responsible. The end of 2015 has been volatile, but U.S. equities are still near a record after the S&P 500 returned 63 percent over the past five years. Rising share prices have given companies a stronger currency. And the deals they pursue boost valuations for their peers, which begets more deals, and round we go.
As of Friday morning, global mergers and acquisitions volume stood at $3.6 trillion, not including more than 200 breakups and 1,000 joint ventures that were struck this year. Interest rates may be on the verge of a hike, but so long as big companies continue to face limited growth, activist investors stay in the picture and stock prices hold up, there's no reason to think M&A should let up all that much.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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