The urge to merge – an update of M&A conditions

Merger and Acquisitions (M&A) continue to be a regular feature in news headlines.

In the first quarter of 2015, global M&A have reached their highest levels since 2007 with a volume of US$887bn. This is an increase of 14 percent compared to the same period last year. Healthcare, Real Estate and Technology are the most targeted sectors globally this year so far with 34 percent of total combined volume. (source: Dealogic).

Conditions that have powered a strong year of M&A in 2014 and which have been the foundation of our investment thesis, have rolled over into 2015. To reiterate, we have identified the high levels of corporate cash holdings, the recovery of boardrooms’ confidence levels after 2008 and the need of finding alternative sources of growth due to corporate margins at all-time highs, as the main drivers of this trend.

However, despite these favourable conditions, returns for specialist managers in the sector have been subdued for the strategy in the past year. We understand this as being the result of continuously low interest rates, low deal spreads and a lack of aggression in hostile bids to date. Whilst disappointing, on the balance of the arguments, our investment thesis remains intact and we continue to invest into this strategy in our portfolios. Increased volatility and a more hostile deal environment will aid spreads and returns for this strategy.