WhatsApp with the Seventh Merger Wave?

By Emma Black (Investment Manager at Tier One Capital) 21 February 2014

The announcement of Facebook’s acquisition of messaging start-up WhatsApp for $19bn underscores the growing pick-up in corporate activity since the turn of the year. Management teams worldwide are beginning to dip into their historically high cash holdings as market sentiment remains optimistic (albeit cautiously so) incentivising CEOs to start using their reserves to bolster growth via M&A. Nonetheless, just as we can’t be sure which way the wind will blow, it is difficult to anticipate whether this recent flurry really is indicative of the much anticipated seventh merger wave.

Market consensus for 2014 suggests that the outlook for M&A looks much healthier than it has in previous years. DLA Piper in its recent annual survey reported that some 70% of respondents expect deal activity to increase across Europe, and the data supported this with Thomson Reuters showing that in the first two-weeks of January, $120bn worth of deals were announced, the most active start to the year since 2011. Google announced its $3.2bn purchase of Nest Labs, Suntory of Japan announced a $16bn acquisition of Beam, Charter announced a $61bn bid for Time Warner Cable, and now Facebook have announced their forthcoming combination with WhatsApp.

But previous years have also begun in a similar fashion. In 2013, we had the acquisition of Heinz by the Berkshire Hathaway and 3G Capital Partners consortium for $27bn. Virgin Media was acquired by Liberty Global for $25bn while Dell was privatised by Silver Lake Partners and Michael Dell for $20bn. 2012 also started similarly with Glencore finally securing its acquisition of Xstrata for $46bn. So is 2014 really going to be any different?

This year has started slightly differently in that markets have been bolstered by a healthy stock market performance during 2013 with stocks such as easyJet earning up to over 100% returns over the year. The recovery of economies worldwide is taking place with funds flowing back into Europe and the US as expectations for developed markets to begin to stabilise in the coming periods are realised, especially as emerging markets are now experiencing age-old problems of inflation, political unrest and economic uncertainty. The key point is that governments and central banks in the developed world have indicated they will do what needs to be done to facilitate economic stability. This means there is a high likelihood for monetary policies to remain broadly loose worldwide to continue to support growth which can be coupled with the positive economic data we have seen of late. With sentiment being a large driver of stock performance over recent years, this qualitatively supports an optimistic outlook for the coming year. 

At a corporate level, favourable credit markets coupled with historically high cash balances are enabling higher leverage. Private equity firms are seeking liquidity with IPO activity supporting this and M&As offer another vehicle through which to cash-out. Moreover interest rates remain at an all-time low. Realistically we do not anticipate large changes in this area given the continued fragility of the global recovery and the detrimental effect that a large interest rate rise would bring. Thus together these could contribute to an active M&A market in 2014.

At Tier One Capital, the team holds a wealth of experience in corporate advisory services, so if you are planning to participate in this growing market, please contact a member of the team to arrange a meeting at your convenience on +44 (0)191 222 0099.