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M&A's Best Days Lie Ahead

Nowadays, big problems and their solutions are expressed in trillions. COVID’s global economic cost has been estimated at more than US$ 12 trillion. The Ukraine war may cause US$ 2.8 trillion in foregone economic output. Investments amounting to US$ 2 to 4 trillion are required annually to engineer the global energy transition. US$ 2.5 trillion of assets are held in ESG funds. In that context, the TV series Billionsmakes Bobby Axelrod look tiny.

Unfortunately, it is well known that such figures are meaningless to a broad audience. About half of the U.S. population places one million halfway between one thousand and one billion on a linear scale. By extension, a trillion is to a billion what XXL is to XL – just a size up.

The high level of abstraction of large figures creates communication issues. Sometimes ‘a lot’ is a lot, and sometimes it is not.

Take M&A activity. The value of global transactions amounted to US$ 6 trillion in 2021, the highest activity level in any given year ever. Six trillion! Record broken! The figure is seized by financial advisors and consultants to encourage corporate action during times of narrow bid-ask spreads and by the media to suggest that the world has once again succumbed to mindless hyperactivity.

But a different image emerges when these trillions are put in perspective.

Relative to the value of the stock market, global activity achieved a ratio of 10% last year. This level was below the average (circa 12%) since 1996. Just a few years ago, 2015 reached a local peak of 14%, itself below that of the late 90s and the late 00s, which were in the high teens. By all relevant measures, 2021 was a mediocre year from an M&A standpoint. The M&A chatter in 2022 presages a dismal 2023.

Considering the behemotian strategic challenges across sectors (see ‘A Rare Consensus’), a much faster corporate portfolio realignment process would be justified. Fast-maturing industry segments are ripe for active consolidation. Meanwhile, large firms must race to build new, core competencies-based growth platforms by acquiring young ventures. More than ever, speed is of the essence.

Corporates may be too afraid of repeating the M&A mistakes of the past, with risk factors including poor valuation frameworks, poor synergies assessment, and poor integration. But the M&A stigma is unfounded. Based on a McKinsey analysis (2021), an organic growth strategy carries the least attractive risk/return profile. The most compelling way forward is ‘programmatic M&A,’ which is about ‘choreographing a series of deals around a specific […] M&A theme.’

The M&A discipline acquired over the last decades can now be leveraged to make calculated strategic bets at a higher cadence. Once economic actors get used to the new macro- and microeconomic regime, M&A activity will shoot up. It is as much an opportunity as a strategic requirement. As B.B. King tells E.P. in Elvis(2022): ‘If you don’t do the business, the business will do you.’

Assuming a level of M&A activity in the mid-teens (as measured by deal activity in relation to stock market value), there will be about US$ 10 trillion of M&A deals per annum in the coming years. That is the new ‘Wow!’ threshold.

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