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2015 was truly a record year for mergers and acquisitions. Fueled by buoyant stock markets, cash-rich corporate balance sheets and continued access to cheap financing, M&A activity soared last year. This has fueled skepticism as to whether the historic run of corporate takeovers can last during 2016.
But the huge M&A momentum may very well continue into 2016. U.S. corporate balance sheets currently hold approximately $2.4 trillion in cash that is sitting on the sidelines. With corporate profit margins showing signs of topping out – and the prospect of higher interest rates down the road – executives may be in a rush to join the M&A party while the getting is good.
2015: One for the Books
Corporate M&A activity surged to $3.8 trillion last year, the highest level ever. Last year’s total easily surpassed the previous high, set in 2007. Of course, that was the year that preceded the financial crisis and one of the worst economic recessions in the U.S. since the Great Depression.
Big Pharma was one of the biggest deal-making sectors last year. Investors likely recall the $160 billion takeover of Allergan (NYSE: AGN) by Pfizer (NYSE: PFE). That was the biggest deal of the year.
The consumer sector also generated acquisition activity. Anheuser-Busch InBev (NYSE: BUD) swallowed up smaller beer giant SABMiller PLC (OTC: SBMRY) for $107 billion.
Analysts do not expect the M&A boom to slow down anytime soon. Takeovers accelerated as 2015 drew to a close. The fourth quarter saw $1.3 trillion in mergers and acquisitions, representing the first quarter of $1 trillion in buyouts since the second quarter of 2007. And according to an October survey conducted by Bloomberg, almost 60% of corporate executives expect to engage in acquisitions over the next year, up from 40% at the same point the previous year.
The Next M&A Wave
It makes sense that M&A activity continues to grow. Whereas investing in organic growth can utilize massive financial resources and time, simply buying a rival firm is a quick and easy way to produce revenue growth. And companies have proven to be very adept at squeezing out significant cost synergies to boost profits and make acquisitions immediately accretive to earnings.
While the health care and consumer sectors were among the busiest for mergers and acquisitions last year, the energy sector missed the party. In fact, oil and gas M&A activity plunged last year, particularly in the upstream patch. Of course, this was due almost entirely to the huge collapse in commodity prices last year.
As the prices of oil, natural gas and a host of other commodities plunged, credit markets dried up and companies quickly entered survival mode. This caused even strong energy companies to lose their appetite for takeovers last year, but that could change this year. That’s because oil and gas assets are cheap, and Big Oil has deep pockets.
For example, investors should carefully monitor Exxon Mobil (NYSE: XOM). It suffered just like the broader sector last year, but it fared better than most. That’s because it has immense financial resources. Exxon Mobil is a $320 billion company by market capitalization and holds a triple-A credit rating from Standard & Poor’s.
The timing is right for a major acquisition. Many smaller rivals are in vulnerable positions, and it would not be surprising at all to see Exxon Mobil scoop up a struggling competitor at a fire sale price. One that comes to mind is fracking company Pioneer Natural Resources (NYSE: PXD), which saw its share price drop more than 30% in the past two years.
Pioneer has access to some of the premier oil and gas producing fields in the United States, including the Permian Basin and the Eagle Ford Shale. The company has a total resource potential of more than 11 billion barrels of oil equivalents. With a $20 billion enterprise value, Pioneer could be a valuable bolt-on acquisition to supplement Exxon Mobil’s already strong oil and gas production.
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