For quite a while Apollo has been working with our clients on increasing exposure to M&A Arbitrage.  Not only does it prove a wonderful diversifier within the construct of our broadly diversified portfolios but the economic environment lends itself to increasing M&A and, thus, is an opportunistic “bet.”

The folks at Morningstar have hopped on the bandwagon.  In a recently released research note they offer the following reasons why M&A should see an increase in activity:

  • “companies are starting to seek M&A as a means to attain growth and improve profitability amid dismal internal growth opportunities stemming from the secular slowdown in GDP
  • the weak economic environment has made M&A an appealing way to “purchase” growth through bolt-on acquisitions, particularly as the economic downturn has shone a light on which companies’ earnings power is sustainable
  • some sectors are still suffering from overcapacity, making the build versus buy decision tilt to the latter”

They go on to discuss how easily M&A financing is to arrange:

  • “the early stage of earnings recovery for potential targets is slowly making debt loads more manageable for an interested acquirer to assume
  • potential suitors have accumulated sizable cash piles during the past two years in response to the uncertain economic climate
  • as GDP continues to grow, the purse strings should loosen and some of this cash hoard could translate into sizable acquisitions”
  • although access to leveraged buyout debt financing for large deals is still an obstacle, the frozen credit markets of 2009 have largely thawed and Treasury rates have fallen to near-record lows
  • a rally in the stock market in the past year and a half has provided equity capital for future strategic activity”