Merger and acquisition (M&A) activity has been vibrant in 2014 after experiencing a lull between 2009 and 2013. During the first seven months, the deal count was up nearly 14% year over year — by Bloomberg’s count, the 14,257 M&A deals globally so far this year have totaled $2.62 trillion, already exceeding last year’s total of $2.37 trillion. The dollar value is the largest total since 2007.1 I believe this acceleration in M&A activity offers a compelling reason for investors to consider value stocks.
What’s driving the M&A surge?
Recent M&A activity has been driven by several factors, including undervalued assets, market share gain, productivity enhancement and technology acquisition. In addition, companies have entered cross-border transactions to obtain a more favorable tax rate, a practice known as tax inversion.
M&A activity supports the value factor
Strong M&A activity appears to influence the value factor favorably. Value’s tendency to outperform growth during periods of strong M&A activity may be linked to M&A transactions putting inexpensive stocks in play for takeover. Let’s take a closer look.
By M&A deal count: The chart below shows the relationship between the volume of M&A activity and the outperformance of value stocks over growth stocks.
Increased M&A Activity Has Historically Correlated with Value Outperformance
- Since 2002, the Russell 1000 Value Index outperformed the Russell 1000 Growth Index by an average of 2.67% when the number of M&A transactions increased from the previous year. Conversely, the Russell 1000 Value Index has lagged the Russell 1000 Growth Index by an average of 4.22% when the number of M&A deals fell from the year prior.2
- The win rate — or the number of times M&A deal count rose and value outpaced growth — was 75% during that period.2
- There is a 0.72 correlation between the number of M&A announcements and the level of the Russell 1000 Value Index to Russell 1000 Growth Index price ratio spread — which means that the number of M&A announcements and the level of outperformance of the value index have historically risen and fallen together for much of the time (1.00 is perfect correlation).2
- The relationship is further supported by analysis indicating that the number of M&A announcements explains nearly 52% of the variation in the level of the Russell 1000 Value to Russell 1000 Growth price ratio spread.
By M&A dollar amount: Since 2002, the annual change in the dollar amount of M&A activity on a year- over-year basis has also influenced performance of value relative to growth. While the dollar value has been relatively stronger than the number of M&A deals, the relationship between the value factor and the dollar amount of M&A is less significant, as the chart below shows.