If there’s one thing that drives a shopping spree, it’s having a lot of money at your disposal.
As I’ve been telling you, there’s been an abundance of cheap money available to Wall Street, large corporations, and major market participants – an extra $31 trillion since 2008 – courtesy of those exceedingly generous money-manufacturers, the central banks.
So naturally, there’s been lots of shopping going on. And today, we’ll show you how you can join in… and profit.
First, let’s have a look at the details of the shopping spree I’m talking about…
The Mergers & Acquisitions Market Is Thriving
Mergers and acquisitions (M&A) are financial deals in which two corporations combine in some way. In a merger, they usually mesh to form a new single entity. In an acquisition, one buys the other.
There are three main driving forces for M&A deals: the desire to be bigger, the desire to be better (often, both together), and, of course, the availability of money.
Even a global pandemic hasn’t dampened these desires. Last year, total global M&A volume jumped by 64% relative to 2020, to hit a record of more than $5.8 trillion.
The total volume of U.S. deals – which amount to just under half of the global total – rose 82% to $2.61 trillion. Deal volume in Europe rose by 45% to $1.26 trillion. And the total deal volume in the Asia Pacific region rose by 47%.
And it wasn’t just existing companies merging with and acquiring each other. Private equity buyouts hit a record of $985.2 billion last year.
Private equity companies purchase companies they think can be restructured and then sold for higher value. It’s like when someone buys a house that needs renovation, fixes it up, and sells it for a profit.
Private equity firms have become key players in the M&A market. Right now, they have plenty of cheap money to hand to compete with the traditional mega Wall Street banks on bigger and bigger deals.
Money Is Money
From a Wall Street investment bank’s or private equity firm’s perspective, it doesn’t matter who is merging with or acquiring whom. It bags billions of dollars in fees for playing matchmaker, regardless.
I know, because I used to work on Wall Street. I started working for Goldman Sachs a few months after the Glass-Steagall Act of 1933 was repealed. That was under the Clinton administration.
That act had kept investment banks and commercial banks apart. Investment banks focused, among other things, on advising their corporate clients on M&A deals. Commercial banks did “boring” stuff like make loans and hold customer deposits.
Once the act was abolished in 1999, the Wall Street banks went shopping. That’s how we ended up with too-big-to-fail financial institutions (but that’s a story for another time).
Back then, at our quarterly managing director meetings, we would talk about who was buying who, and then have side-bets on it.
Times have changed, but the desire to be bigger and better hasn’t.
So far this year, the M&A “pipeline” is heating up as deals from late 2021 move forward.
For instance, one of the largest French banks, Société Générale’s car leasing division, ALD, is buying its Dutch rival, LeasePlan, for €4.9 billion ($5.5 billion). The deal, which is due to close sometime in 2022, would create the largest electric vehicle (EV) fleet manager in Europe.
Another driving force behind acquisitions is one company wanting to buy another to enhance or hasten its growth and gain greater market share. For instance, medical device maker Stryker Corp. agreed to acquire digital care platform Vocera Communications for about $2.97 billion.
Mostly, merging lets corporations grow in size or “scale,” as measured by a larger geographical footprint or more diversity in its products or services. Acquisitions tend to be about buying out the competition, or pushing innovation forward, gaining market share in the process.
Big Deals = Big Money for Wall Street
But the real reason M&As are surging is because taking a chunky fee out of the deals is one of Wall Street’s favorite things.
For the fifth year running, my old employer, Goldman Sachs, nabbed the top spot for advising on mergers and acquisitions, with a 24.1% market share. Goldman advised on more than $1 trillion worth of M&A deals, raking in more than $4 billion in fees for its role of corporate marriage broker in the first three quarters of 2021.
My other former employer, JPMorgan Chase, placed second, with a 21.2% market share. Morgan Stanley placed third at 18.3%. Bank of America at 12.0% and Citigroup at 10.4% rounded out the top five.
This spate of M&As has been turbo-boosted by the abundance of cheap money from the central banks. So much money floating around and over-the-top share prices have distorted the need for companies to care about the true value of the ones they are buying or merging with.
This has especially been the case when companies want to transform themselves across the five key profit sectors we’ve been telling you about – New Energy, Infrastructure, Transformation Technology, Meta-Reality, and New Money.
That means technology across the board. This is largely due to changes in consumer demands and behaviors due to the pandemic. Companies are seeking protection from cyber-attacks or supply chain disruptions or trying to keep up with the incredible transformation that distortion has unleashed.
Putting that distortion and the cheap money together, we see transformational deals taking center stage again in 2022.
According to Nasdaq.com, “Deal activity in 2022 is expected to continue to be strong, buoyed by favorable interest rates and plenty of dry powder in the way of private equity cash piles.”
That means more M&A across healthcare, technology, entertainment, and telecommunications companies.
Three M&A Trends to Watch in 2022
Specifically, we see three main trends in M&A for 2022…
The ESG – environmental, social (responsibility) and corporate governance – investing trend will ramp up as companies continue to revamp themselves for net-zero carbon emission and better social justice attributes. Think mergers between automakers and energy companies to expand electric vehicle charging, which fits into our New Energy investing theme.
More and more technology acquisitions will be driven by non-tech buyers. As you can see from the chart below, this was already a hot area last year.
Retailers are competing to make online shopping and payments easier for customers. It is also driven by mega financial firms fortifying their new money digital banking and payments functions. This falls under our New Money investment theme.
Private equity-driven deals – which were 37% of U.S. deal volume last year – will soar, based on demand for data centers, artificial intelligence, and cybersecurity firms, which falls under our Meta-Reality investing theme.
A One-Click Way to Invest in This Trend
One way to profit from the M&A trend is to invest in an M&A exchange-traded fund (ETF). These funds seek to broadly capture companies for which M&A deals are announced before the deals are closed. They do this on the expectation that the stock values of these companies will rise once the deals are finalized.
Our favorite M&A ETF is the Proshares Merger ETF (MRGR). It tracks the S&P Merger Arbitrage Index, which comprises up to 40 publicly announced deals within developed market countries, primarily the U.S.
And rest assured, over the coming weeks and months, we will seek out the best specific companies in the crosshairs as investment opportunities for you.
Editor, Inside Wall Street with Nomi Prins
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