Our Head of Corporate Credit Research Andrew Sheets
explains why the recent revival of M&A activity has room
to accelerate.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the
Market. I'm Andrew Sheets, Head of Corporate Credit Research at
Morgan Stanley.
Today – a discussion of merger and acquisition activity or
M&A. Last year, we had a view that this activity would pick
up significantly. We think we're seeing that increase now. It has
further to go.
It's Wednesday, October 29th at 2pm in London.
We have been firm believers at Morgan Stanley in a significant
multi-year uplift in global merger and acquisition activity or
M&A. That conviction remains. The incentives for this type of
action are strong in our view; activity still lags what
fundamentals would suggest, and supportive regulatory shifts are
real.
M&A has now returned, and importantly, we think there's much
further to go. Indeed, M&A is very closely linked to
corporate confidence, and we think investors need to consider the
possibility that we'll see an even bigger surge in this
confidence – or a boom.
First, policy uncertainty is declining as U.S. tax legislation
has now passed, and tariff rates get finalized. It's the relative
direction of this uncertainty that we think matters most for
corporate confidence.
Second, interest rates are declining with the Fed, European
Central Bank, and Bank of England all set to cut rates further
over the next 12 months. Third, bank capital requirements may
decline in the view of Morgan Stanley analysts, which would
unlock more lending for these types of transactions.
Fourth, and very importantly, the regulatory backdrop is becoming
more accommodative in both the U.S. and in Europe. Indeed, we
think that companies may think that this is going to be the most
permissive regulatory window for transactions that they might get
for some time. Fifth, private equity, which is a big driver of
M&A activity, is sitting on over $4 trillion of dry powder in
our view – at a time when credit markets look very wide open for
financing their transactions.
And finally, we're seeing a surge in capital expenditure on
Morgan Stanley estimates, which we see as a sign of rising
corporate confidence, and importantly an urgency to act – with
corporates far less content to simply sit back and repurchase
their stock.
All of these favorable conditions together argue for activity to
push even higher. We forecast global M&A volumes to increase
by 32 percent this year, an additional 20 percent next year, and
reach $7.8 trillion in volume in 2027.
This is a global story with M&A rising across regions,
especially in Japan. It has cross-asset implications with M&A
already being one of the biggest drivers of bond outperformance
within the U.S. high-yield market. And this is also a story where
we see a lot of value in bringing together macro and micro
perspectives.
While we think the top-down conditions look favorable for all the
reasons I just mentioned, we also see a very encouraging picture
bottom up. We polled a large number of Morgan Stanley sector
analyst teams and asked them about M&A conditions in their
sector. A large majority of them see more activity.
So, where could these more specific implications lie? Well, as
you heard on yesterday's episode, Healthcare and Biotech may see
an uptick in activity. In the U.S., we also think that Banking
and Media stand out. In Europe, Business Services, Metals and
Mining, and Telecom seem most ripe for more M&A.
Aerospace and Defense is an interesting sector that may see more
M&A within multiple regions, including the U.S. and Europe,
as companies look for scale. And with smaller companies trading
at a valuation discount to their larger peers across the world,
Morgan Stanley analysts generally see the strongest case for
activity in larger companies acquiring these smaller ones.
Thank you as always for your time. If you find Thoughts on the
Market useful, let us know by leaving a review wherever you
listen, and also tell a friend or colleague about us today.
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