Global M&A, let’s look at the recent history of this business. 2004 to 2006, we’re talking about 10 years ago, record breaking yield years in deals. $5 trillion in money exchanged in transactions. 2009, that was the year after the financial crisis, the transaction business took a huge drop, and that’s very typical. This is a quite a cyclical business. The M&A business is highly cyclical. The last two years, we’ve seen increases of 30% or 40% a year. 2014 was a real revival. As you can see some of these huge transactions like Facebook buying WhatsApp, Suntory the Japanese company buying Jim Beam of the United States– that was a liquor business– and some other huge transactions.
2015, basically, we’re seeing a continuation of the last few years of trends where there’s just more and more transactions.
The business has been pretty diversified in terms of industry. Some of the notable industries, however, would be healthcare, telecom, and technology. I’m seeing a lot of M&A deals in those three sectors. Where do you see transactions? Well, M&A has always been a very popular activity in the United States. So it doesn’t surprise me that the United States is about 45% of all deals. Western Europe, 25%, Japan, Australia about 15% emerging markets, which have about 80% of the world’s population and only have about 15% of the deals. And they’d be about 25% or 30% of world income. And the three companies I’ve list– countries I’ve listed here China, Brazil, and Russia probably represent at least half of emerging market transaction.
And I’m defining emerging markets as countries with income of less than $12,000 US per capita. Most of them, of course, have much less than that in terms of wealth. So China, 6% of the volume. Still pretty small considering how big the Chinese economy is. So, as I said, the M&A market is quite cyclical. When you see a lot of transactions, the transactions are usually accompanied by an environment in which stock prices are high. So when stock prices are high, buyers can give their stock to sellers, they give them high priced currency, or they can sell the stock at a high price to investors. It doesn’t make any difference from a numerical point of view.
But you’ll often see a lot of M&A deals with high stock prices. You’ll also see a lot of M&A deals when the banks and other lenders are ready to give money. So they’re interested in providing loans. They’re optimistic. So M&A volumes also tie to debt deals, lenders willing to provide money for transactions. So you could say with a high stock market and liberal lending that the M&A business is tied to optimism. If someone is paying $10 billion for another business, they must be optimistic. They must say, gee, the business is going to improve. The economy is going to be better. That just makes common sense. But as you know, because you all work in the business, business is quite cyclical.
People will be very optimistic for a few years, then they’ll think the world is going to end. And then they’ll start forgetting about that bad time, and they’ll think about the good times again.
What are the kinds of mergers? Well, the horizontal merger is the most popular deal. It’s about 70% of transactions, and that’s really where one company is buying a competitor. So those are the easiest deals for buyers to do. They already know the product line of the seller. They know the customer base and so on. So that’s 70% of the deal, and a lot of what’s driving these similar companies, similar company transactions is that when one company takes over a similar company, there’s a lot of cost savings. You can fire the president and the chief financial officers. There are a lot of duplications.
Vertical deals are less prominent, but that would be where you’re buying either a customer or you’re buying a supplier. So that’s up and down the chain. That would be a vertical deal. You don’t see too many of those. Strategic or diversification transactions, you read a lot about in say a Harvard Business School case study, but they’re a small fraction of the actual deals.
And these are the riskier ones, because the buyer would not know the seller’s business intimately. And finally, they’re at the private equity transaction where an investment fund is buying a business. And that business is usually financed by the investment fund taking on a lot of debt. There’s no synergies, because the business that is being acquired is standalone. So the buyout fund is either trying to improve the company or thinks that they’re buying the company cheap and can sell it expensive later on. M&A is not a guarantee of success. In fact, these large deals you read about in the paper or see on TV, at least half of them really don’t increase the value of the buyer.
Now, the studies only look at public deals. And most deals are private. My experience is if you’re buying a company that’s a competitor or very similar, you’re probably going to have an increase in the buyer’s value. So that’s the kind of deals that buyers should stick to. So just for a question. Sure. If 50% of the M&A transactions fail, does everyone just go ahead with the idea that I won’t be that 50%? Right, yeah. Like I said earlier, optimism governs as business. So everybody thinks I’m going to be the deal that succeeds. And then there’s some managerial elements we’re going to talk about later about that.
M&A is easier to accomplish than finding a lot of new customers or inventing a new product. So that’s a managerial decision there. Let’s look at some facts about this industry. 75% deals are private. So you read about the big public ones, but most deals are private, they’re kind of small, under $100 million. A lot of them are corporations just selling small divisions. You don’t read about a lot of them. Leveraged buyouts, which you do read about in the paper a lot are maybe 10% or 15% of the deals. So these are just facts that we can’t escape.
That being said, the big deals do account for most of the volume. So you could have a $20 billion deal. That would represent $ hundred million– $200 to $100 million. So you can see that the big deals account for most of the volume. What are some trends in this industry as just, kind of, interesting background? It started off with horizontal deals back 100 years ago where competitors were buying each other, building these huge trusts in the United States. They’d have monopoly power and exploit consumers. So at some point, these trusts were broken up by government Fiat. In the late 20s, real stock market boom.
There’s a lot of vertical deals where customers were getting bought by suppliers and so one, new technologies. From 1960, really started the next boom, and that was really diversification. That was the beginning of the beta phenomenon and corporate finance theory. So conglomerates then started forming. 1980s, 20 years later, the conglomerate trend was reversed. So a lot of people were taking these conglomerates over, and then breaking up and selling the pieces one by one to make money. And they– 10, 15 years ago there was the high tech boom. Who could forget the internet and all those deals that were spawned? Then before the crash, it was a very broad-based, every industry participating.
Now we’re seeing a recovery, as I mentioned a minute ago.
Just looking at Europe in LBO volume, you can see that both economies had almost no LBOs 25 years ago. Then they peaked at 30%. Now, as I said, they’re about 15% leveraged buyouts. What are we seeing today? I mean, there aren’t many strategic deals today, that we used to see some big strategic deals like 15 years ago. Phone company buying an internet company, for example, that was strategic. Time Warner buying AOL. Old fashioned publishing company buying an internet company. I mean you don’t see that anymore. Google, Motorola deal about a year ago is one exception. So buyers are concentrating on what they know, buying competitors, buying companies that are very similar.
Up until recently, there was a lot of activity in the energy area. People buying reserves. That’s declined a little bit.
So the emerging market M&A, as I said, it’s kind of a small percentage of the whole deal environment. The fact is even though some of the populations are huge, because the populations have so little income, the economies are quite small. So India, for example, has roughly the same size economy as the state of California.
Nevertheless, you see some of the bigger emerging market firms buying in the developed countries. So, and I’ve been to China quite a bit. You see a few Chinese companies buying American and European companies. India has done some deals. Russia has– Russian companies have done a few. I used to work with Bimbo in Mexico, and they’ve expanded a lot to the United States. So you see it. It’s unusual, but you do see it from time to time.
Investment bankers are often closely allied with the big deals, even many of the smaller ones. So which banks are the lead players? You’ve heard all these names. This list almost never changes from a year to year basis. It’s a very hard business for smaller investment banks to break into. And part of that’s is just the reluctance of big firms to change advisors, because if you change advisors, if you go to Morgan Stanley to someone smaller, then you have to talk to your board of directors and say, well, why’d you pick somebody different. So very hard to change that list. In Asia Pacific, you’ve got a couple of the same names. You’ve got a couple of new ones as well.
Note that no local firms are in the top 10 there. In Japan, it’s a little different. You have a few Japanese firms in the top M&A advisory league.