2015 was a record-breaking year for mergers and acquisitions (M&A). Approximately $4.7 trillion in global deals were signed, and despite high valuations, corporate executives think 2016 should be another record year of growth in the M&A market.

M&A Growth Trends

The two primary factors driving CEOs toward M&A as a corporate strategy are cash and the acquisition of inorganic revenue growth. Access to cheap cash alone is enough to make the average CEO seek out M&A deals. When combined with the need to create year-over-year revenue growth, the two give business leaders a strong rationale for the buying and selling of assets. Sellers are willing to take a loss, and buyers have cash. Companies are sitting on large cash reserves, and they’re looking for ways to make a return out of revenue growth.

In 2016, CEOs are focused on revenue growth through new lines of business and geographic expansion. Entering a new line of business allows a company to leverage its existing customer base with cross-sell opportunities, while expanding into a new geographic area allows it to grow its customer base. Both equip business leaders with a way to grow year-over-year revenues, even if organic revenue growth is stagnate.

Another trend for acquisition targets in 2016 is access to technology that can drive revenue growth and provide for permanent margin expansion. This includes automation and cost-cutting software, supply chain functionality or even a new design process that requires less time and labor hours to operate. In other words, CEOs are more interested in knowledge base than culture when looking for a good fit.

Trends by Sector

The current market, characterized by increased market volatility, is creating growth in both intersector and intrasector deal flow. Rate hike actions are looming, energy prices are climbing and foreign markets are highly volatile. Sector trends tend to follow those industries experiencing a period of flux brought on by new technology, competition, legislation, converging technologies or changing energy prices. Any industry undergoing significant change can provide ample opportunity for those looking to strike a deal. The majority of this change is occurring in the technology sector, specifically data analytics and cloud and data security. Pharmaceutical and biotech companies are highly motivated to orchestrate deals to gain access to new clinical research. Health care and media are also experiencing paradigm shifts, the former due to the Affordable Care Act and the latter due to the transition to mobile platforms.

Trends in Location

Regional trends tend to follow a balance of risk and reward. M&A investors in 2016 are primarily attracted to the United States, due to credit markets and the general state of the economy. Western Europe also looks attractive, but investors are shying away from China. Not only is the dollar strong, but the Fed will likely raise rates again in 2016. Rate increases signal market volatility, but they are also a sign of strength to world markets, and acquirers like to buy strength. That said, some deals may be found in Western Europe and China, where revenue and earnings are in decline due to poor industry dynamics rather than business model. A strong dollar makes this an ideal time to search for acquisition targets outside of the United States, as well, especially for those buying real assets.

Bottom Line

With interest rates at historic levels, companies continue to push for growth in revenue through acquisitions in 2016. This is especially the case for firms in sectors with weak organic growth in revenues. These companies are sitting on record levels of cash, and they are desperate for ways to make that cash work in a low-rate environment. M&A continues to offer buyers and sellers an excellent opportunity to grow their bottom lines without relying on internal growth.

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