KUHN CAPITAL Wednesday, December 13, 2017
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OK, We're in an M&A Boom, But Why?

January 10

Everybody seems to agree that we're entering a strong M&A deal cycle, and the stats back it up. But why?

Even bearish deal lawyer Marty Lipton of Wachtell, Lipton, Rosen & Katz, admits "it appears that there will be an M&A boom in 2005. The recent increase in M&A activity reflects a return to confidence in the economy and to accommodation to the new accounting and corporate governance requirements."

In addition to confidence in the future and "accomodation" (meaning "adapting to" new regulatory red tape like Sarbanes Oxley), analysts also quote balance sheets stuffed with cash and low interest rates.

And then there's the self-reinforcing character of any cycle: CEO's see competitors doing it, and get nervous about whether they shouldn't too.

But we've thought a lot about what explains M&A cycles since we guessed wrong that deal volume would rise in 2001 as buyers rushed to exploit cheap purchase prices. (In fact, what happened was that buyers --faced with lots of unknowns -- pulled back, and target pricing expectations didn't fall much or at all.)

Which brings us to our theory. While we don't disagree with the factors identified above, we think the single most important driver of M&A desire is... revenue.

That is, rising or at least flat seller's revenue, and rising buyer's revenue, otherwise known as demand. It's revenue that generates cash, it's revenue trends that support the buyer's confidence in the future, and it's strong seller's revenue that justifies mutually acceptabe valuations and inspires further confidence in its own future.

So here's a toast to hitting those rosy sales forecasts.


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