Why M&A is on a tear in 2015

Tom DiChristopher

Dealmaking hit an eight-year high in the first quarter as the cost of doing deals remains low and companies are chasing organic growth, the co-president of private equity firm THL Partners said Wednesday.

Total announced mergers and acquisitions reached $902.2 billion in Q1, the highest level since 2007. Deals valued at $1 billion or more accounted for 69 percent of all mergers and acquisitions volume in the first quarter.

Another factor is that big players see stability on the horizon, THL’s Scott Sperling said on CNBC’s “Squawk Box.”

“I think it’s a forward-looking barometer in the sense that people engage in more M&A when they have an expectation of either stability or better growth going forward,” he said. “One of the things you’ve seen is a level of comfort among large strategic players with this stability they’re seeing in the marketplace for the foreseeable future.”

Two other factors have pumped up dealmaking in 2015, he said, the first being the low cost of undertaking transactions.

“Large strategic players are financing deals at 2 percent interest rates. Obviously the math works really well at reasonably high multiples from a stock accretion perspective if you can do that,” he said.

Companies are also striking deals because organic growth is hard to come by, he added. As a result, these players are looking to buy other companies that have organic growth superior to gains in their own core business.

Sperling said it’s a good time for private equity firms to harvest companies. The volume of companies held in private equity portfolios ballooned in recent years because firms held onto them longer than usual due to the recession.

“You’re seeing more harvesting in terms of the magnitude perhaps than you would in an ordinary cycle, but it’s been a good time to harvest because companies have been fixed, they’ve been made better and it’s time for them to be monetized,” he said.

As for whether valuations have gotten too high, particularly in the biotech space, Sperling said many smaller biotechs are being acquired because they have “really important science” that larger players can exploit more aggressively.

“Those are multiples being paid for the science itself, and perhaps for the fact that they’ve already gone through some of the clinical trial issues that often eliminate other drugs,” he said.

Sperling acknowledged it is uncertain how many of those acquisitions would eventually be written down, but he added: “The nature of the tools that we have today to understand both disease states and the nature of the impacts of therapeutics on those disease states is far advanced from even what it was three years ago, and therefore, the probability of success, I believe, is higher in that sector.”

CNBC