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November 2017 | Corporate Credit Views

M&A Activity: Who, What and Where

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Who’s involved? After a slow start to the year, M&A activity is gaining pace and November is on track to be the second highest month for announced deals since 1995. Technology-driven disruption is a driving force and determinant of which sectors are impacted. This includes companies in Media involved in a ‘battle for content’, with companies also striving to find ways to monetize content. Retail is another sector where disruption is driving consolidation, as companies try to survive in the Amazon-dominated e-commerce jungle.

What could tax reform mean for M&A? Strong business confidence due to rising prospects for tax reform may be behind the recent announcements uptick (see Fig.1). Companies are likely to use a large proportion of repatriated earnings – one of the key measures included in current tax reform proposals – to fund M&A activity or for share buybacks. If this in turn leads to less debt issuance than would otherwise be the case, it could be a mildly supportive development for corporate credit spreads. That said, regulatory opposition on competition grounds could see deals be delayed or abandoned, and tax reform itself remains uncertain.

Where are the investment opportunities? Broadly speaking, M&A activity can be supportive for high yield companies if they are being acquired by investment grade rated companies, and in turn an adverse development for investment grade companies who compromise credit profiles. That said, we think it is too soon to infer any impacts from the recent resumption in M&A activity, not least due to the supportive macro and earnings environment, and given year-to-date activity remains muted relative to recent years. Nonetheless, engagement in corporate activities bears watching at this late stage of the credit cycle and given lofty valuations.

Fig.1 M&A – Recent Uptick but Muted Relative to Confidence and Prior Years

Source: Bloomberg, CEO Magazine. M&A volume reflects North American buyers. As of September 2017.


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GSAM Fixed Income Team

The Fixed Income Team, with more than 225 investment professionals, manages investment products to pursue strong, consistent performance across the fixed income market.

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