The following article was written by The Street's sister website, The Deal, which covers the M&A industry. Click here to see more.
U.S. mergers and acquisitions jumped 38% in the first 10 months of the year, to $1.3 trillion, from a year earlier, according to data from Dealogic. That's likely to make 2014 the strongest year for deals since the 2008 financial crisis.
"To a certain extent, there has been pent up demand," says Mark Shafir, co-head of Global M&A at Citigroup. "With interest rates where they are and a generally improving economy, you would have thought we would have seen more deal activity already. But it seems like 2014 is where it really came to fruition."
The improving macro picture seemed to give corporate executives a jolt of confidence about doing deals this year.
"Fundamentally I think what changed -- and I'm not sure when -- but confidence crept into the board room," says Jim Frawley, U.S. head of M&A Macquarie Capital (USA).
Global M&A -- involving deals with a minimum value of $100 million--jumped 59% during the first nine months, to $2.1 trillion, according to The Deal's data.
The number of deals increased only 8% during the period, a sign that so-called megadeals have returned.
"The big deals, the transformational deals, above $10 billion have really been the driver -- for a whole host of reasons," Citi's Shafir says.
Megadeals spanned several sectors and included a host of cross-border M&A and tax inversions. The impetus was part tax-breaks, part cheap currency and part search for expedited growth.
Inversion deals-or transactions by U.S.-based companies seeking to reincorporate in lower-tax countries-made headlines throughout the year. But classic cross-border mergers also climbed as companies sought opportunities for expansion.
Drug makers and healthcare companies contributed to eight deals and $80.6 billion in tax inversions through the end of October, Dealogic data shows. That compares with just four deals and $53 billion a year earlier.
But inversions have drawn criticism in Washington, with the Treasury announcing Sept. 22 several steps to limit the deals.
Uncertainty over potential prohibitions and further legislative action is already having an impact, with drugstore chain Walgreen (WAG) backing away from its initial plans to re-domicle in Europe in connection with its $23.8 billion acquisition of its U.K. peer Alliance Boots GmbH.
"While inversions have obviously hit a roadblock, we continue to see healthy levels of cross-border activity including from European corporates seeking to diversify their footprint," says Sarkis Jebejian, partner at the law firm Kirkland & Ellis.
As often happens, companies find that it's easier to buy growth than to create it internally.
"There is a lack of organic growth that people are trying to get a hold on and paying up to achieve," says Macquarie's Frawley. "You are also seeing a ton of number two and number four players want to get together, because they have been stuck or stagnant over the last few years."
While mega mergers have dominated headlines, private equity has been quiet, especially in the large-cap space, partly due to lofty valuations of most public companies.
"As there are fewer obvious public, large cap companies to chase, large funds are dipping into the middle market," says Christopher Rile, partner at Ropes & Gray. "You do see a willingness of firms that have been buyout only willing to do PIPE deals and large structured minority stakes."
Also hindering private equity's ability to do deals is the fact that banks have been hesitant to put debt into larger LBO transactions. New regulations have made it tougher for banks to lend, forcing institutions to keep tighter tabs on debt-to-earnings ratios and other metrics used to judge a company's ability to pay back a loan.
"The government has recently made it more difficult for banks to lend to private equity buyouts by providing more regulatory scrutiny of these transactions," says Chris Hagan, co-chair of Brown Rudnick's corporate team who has worked on more than 100 LBO transactions throughout his career
"A deal that used to take two banks to get done, now might take four," says Citi's Shafir. "That has led to smaller deals on the private equity side and more on the strategic."
Shafir adds that about 65% of strategic buyouts have been funded with some kind of stock.
"I think that you will continue to see deal flow from strategics if they can continue to use that high currency to pay for deals," he says.
While the deal activity has been robust across all sectors, each industry has its own unique drivers.
There are two major catalysts in this sector: the switch to the yieldco structure, under which allows utilities put assets in special corporate entities that mimic the economics of MLPs and REITs, and the desire to gain more exposure to the stable revenues of regulated assets.
Utilities are also refocusing on the regulated side for earnings stability and growth, and some are doing so by acquiring pure-play regulated utilities.
Activity has remained strong for oil and gas players, even outside of megadeals. These transactions have been fueled by the MLP structure and drop-down transactions, as well as spin offs and divestitures, according to J. David Kirkland and Kelly Rose, co-Chairs of the corporate practice at Baker Botts in Houston, who worked on the Halliburton-Baker Hughes tie up.
Dealflow has been buoyed by high equity valuations, cheap debt and regulatory issues surrounding the Affordable Care Act. And, of course, inversions. The industry as a whole posted $212 billion in deals through Oct. 31 (the highest grossing sector), according to Dealogic.
On the healthcare services side, deal activity revolved around such areas as home health and hospice care in the face of fluctuations in the levels of state and federal funding. The most notable services deal may have been the $1.8 billion deal by Louisville, Ky.-based Kindred Healthcare (KND) to purchase Atlanta home health rival Gentiva Health Services (GTIV) .
A changing regulatory environment also fueled M&A activity in this sector, mainly in the middle and lower middle market. Regional banks, for instance, are attempting to scale up operations amid tougher capital requirements for lending and are merging with like size peers.
The healthy food craze continued to drive deal making as large players looked to add high protein, natural and organic snacks and food products to their umbrella of offerings.
Consumers' attachment to their furry friends contributed to the strength of the retail market, with valuations continuing to appreciate as shoppers shelled out more and more money to achieve healthier lifestyles for their pets.
Grabbing the biggest headlines was PetSmart (PETM) , which following pressure from activist investor Jana Partners LLC to pursue a sale is said to be in discussions with potential suitors and nearing a deal. Meanwhile, others in the space have been consolidating.
Already in November, Petco Animal Supplies agreed to acquire Foster and Smith, and Zoetis (ZTS - Get Report) purchased the assets of animal health business Abbott Laboratories (ABT - Get Report) for $255 million.
Technology and Media
Among technology, media and telecom companies, the big show was all about cable consolidation. Comcast (CMCSA) agreed to acquire Time Warner Cable for $67 billion, after which Charter Communications (CHTR - Get Report) struck a deal to buy, sell and swap $21.6 billion worth of cable systems with Comcast. AT&T (T - Get Report) is purchasing DirecTV (DTV - Get Report) for $67 billion.
There are limits to what shareholders will accept, however. Rupert Murdoch's 21st Century Fox (FOX) stunned the industry by launching an $80 million hostile bid for Time Warner (TWX) only to end up walking away in August.
While cablers were trying to get bigger, tech conglomerates sought to slim down.
Hewlett-Packard (HPQ - Get Report) announced it would divide into one company targeting enterprises and another focusing on consumers, while JDS Uniphase (JDSU) and eBay (EBAY - Get Report) are in the midst of splitting up their business operations.
Industry watchers say deal activity will remain strong as long as borrowing reamains cheap.
"We've now for five-plus years had record-low interest rates and everyone seems to expect that to end at some point," Jebejian, of Kirkland, says. "It's a reinforcing dynamic that creates an incentive to act now."