UBS Investment Research
Get Set for the Next M&A Wave
As Organic Growth Slows, Firms May "Buy Growth" via M&A
U.S. nominal GDP growth is slowing (Chart 1), and this trend will continue due to
baby boomers retiring, increased regulation, consumer deleveraging, and tax hikes
to reduce the Federal deficit. Therefore many large firmswhich have ample cash,
free cash flow, and borrowing powerwill likely attempt to "buy growth" via
M&A. We think now is a good time to do so because equities are not expensive
(Chart 5) and profits should grow for the next few years. In this report UBS
analysts summarize potential deal activity in 35 industries (Tables 1, 3).
Will Companies Deploy Cash Effectively?
Often they do not; M&A waves usually turn into manias (Table 5). However, since
2002 S&P 500 firms have used cash intelligently by accelerating dividend growth,
reducing share counts via buy-backs, cautiously increasing capex, and making
relatively rational acquisitions. Hopefully, this pattern will continue. Many of the
possible deals discussed in this report have the potential to create value for the
buyer if sensibly priced.
Two Ways to Win
One can invest in potential acquisition targets, preferably ones that will be good
investments even if they are not acquired. Table 1 lists 30 potential M&A
candidates, of which 15 are rated "Buy" by UBS analysts. Another approach is
investing in companies that have a good track record of growing via M&A (Table
2); such companies tend to do numerous smaller deals, which are less risky than
mega-deals. The financial distress of targets can create good opportunities for
buyers in such industries as auto supply, insurance, and banking.
Global Equity Research
8 December 2009
US Equity Research Department
Thomas M. Doerflinger, Ph.D.
Chart 1: Slowing U.S.