Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

What to expect after a year of frenetic, if not record-breaking, M&A? 

The roughly $3 trillion in global takeovers announced in 2016 was near the top of the all-time charts, but fell short of last year's record in large part because there were fewer megasized, $10 billion-plus acquisitions. 

What's In a Record
This year didn't break many records, but M&A volume remained at historically high levels. The U.S. continued to be a key focus for acquirers in 2016, making up about half of the total volume.
Source: Bloomberg
Note: 2016 data as of Dec. 21

Bankers still stayed plenty busy: It was the second-largest year for U.S. deal volume in the last two decades, while the number of large takeovers done globally still well surpassed the 20-year average. And there's reason to be optimistic about 2017.

Megasize Me
Acquirers announced around 35 large takeovers in 2016, compared with more than 50 last year
Source: Bloomberg

Near the top of President-elect Donald Trump's agenda is a plan to encourage companies to bring home cash they've stockpiled overseas and out of reach from the Internal Revenue Service. Cisco Systems Inc.'s CEO Chuck Robbins is in control of one of the biggest foreign cash hoards at about $60 billion and he'd like to spend that on "buybacks, dividends and M&A activities." That's not an encouraging response for anyone hoping some extra cash would inspire a U.S. manufacturing renaissance, but it's good news for Wall Street -- that's the idea, right Mr. Trump? 

Dollah Dollah Bills, Y'All
Tech companies are sitting on the biggest piles of overseas cash, but industrial companies are sitting on decent hoards as well
Source: Bloomberg
Honeywell says that a "substantial portion" of its 2015 cash and equivalents were held overseas. Stifel analyst Rob McCarthy estimates that all of the roughly $6.4 billion that the company held as of Sept. 30 is overseas.

Apart from available funds, the other big driver of M&A is CEO confidence, and few things make chief executives more confident than rising stocks. The Dow Jones Industrial Average is flirting with 20,000 for the first time, reflecting confidence that Trump will usher in a pro-growth, business-friendly agenda (despite the fact that he seems to have taken a liking to micromanaging companies via Twitter).

And CEOs won't just be empowered to pursue your run-of-the-mill M&A. Trump's nominees thus far for positions with sway over antitrust matters signal a lighter touch than we saw under President Barack Obama, whose term included the successful barring of mergers between Staples Inc. and Office Depot Inc. and Halliburton Co. and Baker Hughes Inc.

But rising stocks are a double-edged sword that's also set to make M&A in some industries more expensive.

Watch Your Wallets
Buyers found some price discipline in 2016. Globally, acquirers paid a median of 12.7 times Ebitda, down from 14.4 times in 2015 -- a 20-year high.
Source: Bloomberg

Take industrial companies. You'd be hard-pressed to find a CEO in the growth-starved sector that hasn't voiced a desire for M&A. Freeing up overseas cash will give them extra ammunition and could set off a flurry of dealmaking. Many of the companies they would acquire with that cash, however, have seen their stocks rise as investors wager on a big sales boon from Trump's proposed infrastructure and defense investments.

Things start to get expensive when you're paying a premium to a stock price that's built in much of the potential upside of Trump, but none of the possible downside -- such as his protectionist policies or the fact that he's about as predictable as the roster of Trump Tower visitors (hello, Kanye). 

What Goes Up...
A look at some of the biggest gainers following Donald Trump's election. Industries such as banking and construction-related companies could see M&A.
Source: Bloomberg
Data is as of Dec. 21

This phenomenon -- also seen in sectors that will benefit from more relaxed regulation such as banking and TV stations -- could encourage more deals with a stock-based component as companies seek to take advantage of their own rising currencies. That would reverse a clear preference for cash in 2016.

Low interest rates have lent a helping hand to acquirers with expensive tastes by making practically any deal look accretive. Borrowing costs are still relatively low, but they're upward bound, with the Federal Reserve raising benchmark rates in December and calling for a steeper path of increases next year. The strain of the debt-fueled deal boom is already showing. As Gadfly's Tara Lachapelle has noted, goodwill is already reaching worrisome levels.

The party isn't over, but it's getting long in the tooth.

--With graphics by Elaine He

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net