The last several years saw a relative dearth of mergers and acquisitions amid higher interest rates and a skeptical regulatory regime. Leadership at the antitrust unit of the U.S. Federal Trade Commission was relatively aggressive in enforcement and in defining what it considered anticompetitive business combinations. The new Trump administration was generally expected to be more market- and business-friendly, although that narrative is under question given Trump’s extension of existing antitrust rules.
That said, we believe that any aggressive antitrust enforcement would tend to focus on very large companies, leaving M&A opportunities across much of the market, particularly for small and medium-sized names. At the same time, capital markets are open for deal financing, macro conditions remain strong, and overall issuer fundamentals appear stable.
In sum, we believe that management teams are becoming more comfortable in moving ahead with transactions, driven by a desire to reach and exploit more markets, and access additional products and business lines. For conglomerates, deals may seek to monetize assets and/or unlock stranded value. The net result could be expanded activity, in traditional M&A, as well as spinoffs, corporate splits and more.
From a credit perspective, M&A activity should create new opportunities for security selection. Issuers may choose to leverage their balance sheets to finance transactions, affecting overall credit profiles. In both investment grade (IG) and non-investment grade (non-IG), increased activity can drive new primary market issuance, creating fresh opportunities to evaluate deals. In high yield markets, we believe upside potential exists where issuers are acquired by higher-rated IG companies.
Bouncing Back: M&A Is Recovering from 2023’s All-Time Low Relative to GDP
Gross Issuance and M&A Activity Forecasts
Source: Dealogic, Federal Reserve, Morgan Stanley Research forecasts.
Current Dynamics
Current M&A activity is generally divided into strategic moves and efforts to release trapped value in larger companies. It often involves the interplay of issuers across the credit quality spectrum, and we are seeing increased interest by IG buyers in picking off non-IG companies that may offer a strategic fit.
Overall, industrial issuers have de-levered and are capitalizing on strong balance sheets. By the same token, some IG companies in the A category appear willing to take on more debt for purchases, potentially moving themselves into the BBB space. In our view, transaction multiples thus far have been relatively attractive and have provided support for issuers. The increase in activity is also a sign of strategic investors’ confidence in the stability and recovery in various end markets, while consolidation can present a more favorable competitive dynamic over the longer term.
Across sectors, we are seeing the following themes:
Telecom and cable/media. Fixed-mobile convergence has been a key transaction theme, with examples of large IG telecom companies buying non-IG issuers with fiber-to-the home capabilities. In media, consumers are driving the need for consolidation in the streaming space as consumer viewing habits continue to trend toward streaming.
Insurance. Several larger non-IG insurance brokers have been acquired by larger IG players. In our view, such brokers will continue to be viewed as potential acquisition targets. Solid business fundamentals, a fragmented industry, healthy valuations and open capital markets should foster deal activity.
Commodities/Energy. Following increasing expectations for power demand and tighter power market conditions, we have seen an increase in private assets monetizing and changing hands. Underscoring a “power scarcity” theme across both renewable and traditional fossil fuel sources, a large nuclear power producer recently agreed to acquire a leading gas-fired power company. Although coming off of elevated activity levels in 2023 and 2024, upstream hydrocarbon production M&A is expected to continue at a more moderate pace as asset owners look to improve drilling economics and replenish attractive drilling locations.
Basic Materials. After a multiyear dealmaking drought, we have witnessed a resurgence in M&A activity in the basic materials space. In metals and mining, large IG miners have started to deploy their strong liquidity in acquisitions to overcome currently limited organic growth opportunities while seeking additional exposure to more promising metals like lithium and copper, which are expected to play a major role in the energy transition. In Chemicals, undervalued conglomerates have looked to monetize less-strategic businesses, potentially reinvesting the proceeds in core businesses both organically and via future M&A activity.
Packaging. Although historically active, M&A in the packaging sector has seen a relatively slow couple of years. However, there are signs of a rebound, including two recent transactions: a purchase involving companies looking to accelerate product innovation, enhance customer service and augment sustainability; and an acquisition designed to augment faster-growing, higher-margin product categories, increase scale and grow geographic diversification. Such examples had implications for issuers’ credit profiles, reinforcing the importance of bottom-up security selection.
Industrials. Transactions have increased across the sector, reflecting efforts to release value at some large conglomerates, as well as efforts to generate scale and exposure to attractive markets. Strategic activity has extended beyond pure-play M&A, to the monetization of certain assets to foster value creation. While deals have generally been executed at attractive valuations, they can carry mixed implications for credit quality depending on the structure of the transaction and pro forma plans.
Consumer/Retail. Large companies have enjoyed price-led growth and are now facing a more challenging consumer environment, trying to solve for how to grow toplines beyond just by raising prices. This will likely lead to more bolt-on deals as companies make acquisitions in appealing categories, especially given the evolving “Make America Healthy Again” regulatory environment. Balance sheets are generally at or below companies’ leverage targets, with room to add debt for attractive transactions should they emerge.
Technology. Big companies with the ability to bolster their research-and-development spending have led the rapid innovation in artificial intelligence and broader areas of secular growth. However, smaller-scale players in niche areas continue to be disruptors, and we expect the acquisition of these disruptors to be the key means with which M&A activity appears in the sector, with limited credit impacts. Larger-scale deals under the extended antitrust rules will likely be more challenging.
Health Care. Large-scale M&A could see a resurgence if regulatory roadblocks ease. We anticipate continued bolt-on deals to fill gaps in portfolios and innovation pipelines. Companies are also incrementally adjusting their portfolios through spin-offs and divestitures of lower growth/margin businesses.
Distinguishing Activity From Progress
M&A activity is often a double-edged sword for bondholders. At times it can reflect managements’ focus on growth for the benefit of stockholders, which may come at the expense of balance sheet strength, and presage credit-rating vulnerability. At other times, it may simply involve poor choices that lead into fundamental cul-de-sacs rather than strategic solutions to business challenges. More positively, deals can look to expand presence and capabilities in ways that seek to augment cash flow and enduring business growth.
Although we have seen some examples of the two first categories in recent months, on the whole we are finding generally constructive transactions reflecting what we consider an appropriate use of balance sheets in a favorable economic environment. While the policies of the current presidential administration are creating some uncertainty, we believe that business leaders will increasingly commit themselves to executing transactions with potential for catalysts and implications to credit profiles.
In assessing this opportunity, the key for us, as always, will likely be careful security selection as we look to assess the potential impact of deals in what could become an increasingly active M&A environment.
