Record M&A Activity Likely To Continue In Second Quarter With Tech, Financials, Industrials Leading The Way, Analyst Says - Forbes

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Global M&A activity reached $1.3 trillion in value in the first quarter of 2021, according to recent data from Refinitiv, the London-based market data provider, a 94% surge from the first quarter of 2020, led by high flying tech stocks as well as SPAC deals and driven partly by low borrowing costs, a pattern that should sustain itself in the second quarter.

Key Facts

John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, told Forbes on Monday that the M&A frenzy has been driven by low borrowing costs, as reflected by low interest rates, and a surging stock market that has allowed highly priced companies to acquire other firms using their own stock to make acquisitions.

Stoltzfus thinks M&A activity is likely to remain “robust” in the second quarter as U.S. and global economies recover and move toward an economic expansion and interest rates remain very low.

The tech sector, which has witnessed big advancements in cloud computing due to a shift in remote working, accounted for more than one-fifth (21%) of all first quarter deals, amounting to $274 billion in value, followed by the financial sector (16% of deal activity) and industrials (13%), Refinitiv said.

Stoltzfus said technology stocks will likely keep leading M&A activity, but so will consumer discretionary, transportation, health care and financials stocks as more companies seek ways to unleash further growth, while cutting costs.

The U.S. alone accounted for about one-half ($670.5 billion) of overall first quarter deals, a 161% surge from the same quarter last year, Refinitiv noted.

Key Background

Some of the largest deals in the first quarter included Irish aircraft leasing firm AerCap Holdings buying General Electric’s aircraft leasing unit for $30 billion and Canadian Pacific Railway acquiring Kansas City Southern for $25 billion. M&A activity has already gotten off to a smashing start in the second quarter — last week Microsoft said it will acquire Nuance, a developer of artificial intelligence, in a transaction valued at $19.7 billion, marking Microsoft’s second biggest ever takeover, following its $26 billion acquisition of LinkedIn in 2016. Also last week, Singapore-based ride hailing start-up Grab announced it will merge with a special-purpose acquisition company (SPAC), backed by tech investment firm Altimeter Capital, in a deal valuing Grab at about $39.6 billion ahead of a planned New York listing – the biggest SPAC deal ever.

Crucial Quote

“This is as robust and broad-based an M&A market as I have witnessed in the last 20 years,” Colin Ryan, co-head of Americas M&A at Goldman Sachs told Reuters. “We are in an environment where assets are scarcer than the available capital right now.”

Tangent

Mergers accomplished via SPACs – where an entity raises capital through an initial public offering in order to acquire an existing company — accounted for a record $232 billion in deals in the first quarter, or 17% of total deal activity, Stoltzfus expects that due to the success of SPAC mergers over the last year, SPACs will remain “on the scene for as long as the structure works for investors and issuers and if regulation — when it arrives – proves [to be] not too onerous.”

What To Watch For

Stoltzfus opined that if the Biden administration succeeds in pushing corporate taxes to 28% that could boost M&A activity globally and domestically as companies that “prove less vulnerable to an increased tax regime look to expand cross borders.” In addition, Stoltzfus said if Biden’s huge infrastructure build-out program gains real traction, stocks in the industrials, energy and materials sector could see increased M&A activity later this year.

Surprising Fact

The value of M&A deals in first quarter of 2021 was the second highest quarterly figure ever reported, falling slightly below the $1.4 trillion in deals announced in the second quarter of 2007, when the market saw a flurry of massive buyouts, including Rio Tinto's $38 billion acquisition of Canada's Alcan Inc. and Blackstone Group's $20 billion acquisition of Hilton Hotels, just prior to the global financial crisis.

Chief Critic

Peter Weinberg, founding partner and chief executive of investment advisor Perella Weinberg Partners, told Reuters that the “current momentum [in M&A activity] could be derailed by a resurgence of inflation, a resulting increase in interest rates, or declining confidence — but I don’t expect this in the near or intermediate term”.