A $1.7 Trillion Goldmine of Opportunity
2016 may go down as one the wildest years on record.
But it’ll also go down as one of the most impressive with regards to mergers and acquisitions. From the $26 billion buyout of LinkedIn to the $60 billion deal to take EMC private (largest tech merger in history), 2016 was a significant year.
In fact, according to reports, cash-rich corporate buyers shelled out some $1.7 trillion for U.S. and European mergers and acquisitions in the year. That’s a near 8% jump year over year, and the largest ever recorded.
That happened for multiple reasons, including boardroom confidence, cheaper debt financing with interest rates at historic lows, pressures to improve profitability in a slower-growth economy, and a need to keep up with rivals that have been consolidating as well.
In our opinion, that trend is far from over. As a matter of fact, it may have only just begun as corporate cash now approaches $2 trillion.
Look at biotech and pharmaceutical companies for example.
About 17 of these companies are sitting on $220 billion in cash, possibly ready to spend that on a further buying spree. That could easily happen if Donald Trump allows the repatriation of offshore cash at lower tax rates.
Or look at technology. After taking EMC private in a $60 billion deal, Dell said it anticipates further consolidation in the market for servers and storage.
Or restaurants. The market has been open to industry consolidation with a belief the industry has finally hit rock bottom. In many cases, valuations have slipped so badly, it could easily prompt further mergers and acquisitions.
Or even gold producers. Falling reserves and improving balance sheets could fuel that boom, too. In fact, according to Barron’s, Barrick (ABX) has several large-scale development projects but it's talking openly about acquisition opportunities. Pretium Resources (PVG) could become an M&A candidate once its mine becomes operational.
In short, the opportunities are seemingly endless. Better, yet, up to 75% of corporate executives note that they expect even higher merger and acquisition volume this year. Up to 64% expect for deal value to increase, as well. Only 3%, according to a survey, believe volume will fall.
Top it all off with an improving M&A environment under Trump and 2017 could be a stellar year for smart investors. There’s also still plenty of liquidity. For years, companies have been hoarding cash and now want to spend. In fact, S&P 500 companies held as much as $1.5 trillion in cash in the third quarter of 2016.
They’re now looking for ways to earn a return on that cash.