Merge or Die: Slow Economy Sheds New Light on M&A

Merger activity will get a much-needed lift when companies realize that acquisitions are the only way to expand in a slow-growth economy.


Few people have thought more deeply about mergers and acquisitions than Martin Lipton, who for decades was the managing partner of New York–based Wachtell, Lipton, Rosen & Katz. Lipton was a key player in the explosion of deals that ignited in the mid-’70s and, with a few recessionary breaks, grew in number and volume until 2008. Now 82, Lipton has participated in all four decades of that era: advising, advocating, developing tactical innovations, building the firm he co-founded. His own career rose on an ascending staircase of M&A transactions as he grew Wachtell Lipton into one of the most powerful — and most profitable — corporate law firms around.

Yet for all that success, for all his tactical brilliance, Lipton has for decades displayed ambivalence about the evolution of M&A. He has never reconciled himself fully to the shift from stakeholder to shareholder governance, and he has long decried the waste and destruction of M&A. For half a century he has been the most articulate, effective and controversial advocate for managerial and board prerogatives. And he is the master of corporate defense: His poison pill was a killer app of M&A from its invention in the early ’80s right through the ’90s.

Lipton’s view of how all this came to pass is subtle, even ironic. A series of proxy fights in the ’50s provoked 1968’s Williams Act, which regulated tender offers. “In large measure, the adoption of the Williams Act produced the patina of respectability to hostile tender offers they previously had not had,” he explains. “This graduated from a secondary activity into major investment banks prepared to engage in it. Ultimately, in 1974, Morgan Stanley advises [nickel mining giant] Inco to make a bid for [battery maker] ESB, opening up the business of hostile tender offers.” And so M&A was unleashed.

Today, Lipton observes an M&A business that is struggling to recover from the financial crisis. Business is slow. Around him voices have begun to murmur that the modern era of M&A — the age of not only Lipton but Skadden Arps Meagher & Flom’s Joseph Flom, Lazard Frères’ Felix Rohatyn and Morgan Stanley’s Robert Greenhill; of raiders, greenmailers, activists and arbitrageurs; of private equity titans and daisy-chain transactions — might be over. Gloom prevails.

M&A has long been a business that runs on optimism. The effort required to buy another organization — negotiate a price, perform effective due diligence, resolve legal and regulatory requirements and defeat other bidders — is daunting and time-consuming, high drama and remarkable tedium. The machinery of M&A is large, complex and fragile, a fluid constellation of bankers, lawyers, accountants, consultants, corporate executives, directors and investors of all kinds. It is both a mechanism of change and an intricate set of financial, organizational and legal technologies. Perhaps the greatest and most commonly overlooked aspect of M&A happens when the deal is done: postmerger integration, or effectively knitting two corporate entities into one.

None of M&A is easy, and the risks are considerable — too large, apparently, for many companies still focused on disaster and seemingly content to accumulate cash, passing some of it to shareholders when they grow restive. This is a big change. The modern era of M&A, which began in the mid-’70s and was characterized by shareholder governance and deregulated markets, has been both cyclical and expansionary. Recessions reduced the size and number of M&A deals for two or three years only to see them roar back, each wave mightier than the last. What drove those successively higher waves was the expansion of M&A into the middle market and into the developed, then emerging, economies. Throughout this period M&A was broadly tamed and routinized, moving beyond an activity that once seemed to belong to cowboys, pirates or, most famously, barbarians.

Now, in a less than vigorous economy, M&A has sputtered, knocked back by uncertainties triggered by various macro and micro shocks. True, by 2013 those uncertainties no longer seemed to have the bite they had in 2009 or 2011. But despite positive financial developments — low rates, hot markets, cash-rich companies — 2013 looks like another disappointing year, salvaged only by some megadeals that inflated volume figures but did little to hide the fact that the number of deals is down.

But don’t pronounce the end of an era too quickly. Although much has changed, the underlying reality — in many ways, the fundamental drive — of M&A has not. M&A will revive when both companies and investors feel they have no other option for growth. That time is coming. Companies have struggled through the postcrisis period by cutting costs and stressing productivity; it’s been an impressive performance, but it’s one reason the economic recovery has not been stronger. Corporations and investors now hold record piles of cash — Boston-based Bain & Co. estimates more than $300 trillion globally available for investment — much of which has not gone into capital expenditures or M&A. Though profits remain high, revenue growth is feeling the strain. Eventually, many companies will have to turn to other sources of growth: new technologies, new businesses, new geographies, new products. M&A may be the only answer.

In the 1970s and ’80s, M&A dominated the headlines, with one spectacular and often hostile deal after another. M&A emerged as a powerful engine of restructuring and revival for a corporate sector widely viewed as sclerotic, shareholder-unfriendly and crippled by conglomerates. Beginning in the mid-’70s, deal activity and volume grew with machinelike regularity. M&A created a colorful language all its own — Saturday night specials, Pac-Man defenses, poison pills, white knights — and featured a cast of larger-than-life figures. After the ’80s ended in recession, scandal and Michael Milken’s fall, M&A staggered, only to bounce back a few years later — less scandalous but broader, deeper, more global — with steady year-on-year increases. A pattern was set: Each leg of M&A expansion was bigger than the last.

By the time the ’90s boom ended in the dot-com bust, few questioned whether M&A would revive once markets recovered. And it did a few years later; by the mid-2000s it was producing volumes driven by private equity. By then a cyclical but still-growing M&A regime was an integral part of an expanding global, market-oriented financial complex. A record $4.27 trillion in global M&A volume was generated in 2007 on more than 40,000 transactions.

Then came 2008. Wall Street all but collapsed. Recession and recrimination followed (see also “Wall Street: No Firm Is Above the Law”). M&A imploded; private equity struggled to close — or escape — deals negotiated at the market top. By 2009 global volume had fallen by more than half from the peak, to $1.9 trillion, according to Thomson Reuters. Improvement came slowly. In 2011, U.S. M&A surged, only to tumble after the fiscal cliff; 2012 came in under that. In the first few months of 2013, after a handful of early deals — the proposed $24 billion Dell management buyout, Berkshire Hathaway’s teaming up with Brazil’s 3G Capital to buy H.J. Heinz for $23 billion and American Airlines parent AMR Corp.’s agreeing to merge with US Airways Group for $11 billion — the New York Times led its front page with a story headlined “Confidence on Upswing, Mergers Make Comeback(see also “Top 10 Deals of 2013”).

Well, not yet. The rest of 2013 floundered, buoyed only by more megadeals, including Verizon Communications’ $130 billion acquisition of Vodafone Group’s stake in Verizon Wireless and Omnicom Group’s $35 billion merger with Publicis Groupe. By the summer deal activity was substantially down in the U.S., Europe and Japan. By the third quarter U.S. private equity activity was off 19 percent from 2012, though volume was up. Even sectors that had been hot — health care, technology, energy — struggled. Financial services M&A was moribund. The third quarter was the worst for completed volume globally in ten years.

Let’s be clear: M&A is hardly extinct. Instead, it has sunk to the levels of the early to mid-2000s. That’s a problem, at least for Wall Street. M&A activity is smaller than the industry that grew to service it, not just for big caps but across the middle market; not just in the U.S. but around the globe. Another, far more significant, if controversial, issue is that M&A is less available as a blunt but powerful corporate tool for growth.

M&A is by its very nature a bullish business. Every deal is a triumph of hope over fear. Each December, Steven Goldstein, CEO of Alacra, a media aggregator based in New York, gathers projections for M&A and posts them on his blog. A year ago he summarized ten reports from around the world: Eight were positive, a few giddily so. PricewaterhouseCoopers declared that “fundamentals are strong for U.S. mergers & acquisitions activity in 2013.” A survey by Mergermarket found that “numbers should rebound behind the strength of strategic buyers, the emerging markets, and energy sector.” RBS Citizens saw a “perfect storm” of factors driving M&A activity in the U.S. middle market. Web portal predicted China would drive outbound M&A. Ernst & Young forecast a big year in India. And Jordan, Edmiston Group, an independent, New York–based investment bank, called this “one of the fertile times to be in media mergers and acquisitions.”

None of the upbeat predictions came true. When asked whether this overshooting is common, Goldstein fires back, “Always.”

Executives have been no better than advisers at forecasting. Beginning in 2009, surveys of corporate managers consistently expressed the belief that M&A would rebound as it had in 1993 and 2004. When that failed to occur, experts provided off-the-cuff, if sometimes politically tinted (fear of President Obama, aversion to tax increases), explanations for why companies were content to hoard cash like dragons. The threat of tax increases arose year after year to explain why deals were about to surge (usually by year-end to avoid future taxes) or hadn’t (the pipeline emptied by year-end selling). Some of these explanations made rough-and-ready sense: The crisis did trigger destabilizing aftershocks. But by 2013 the failure of prediction seemed to encourage more-extreme interpretations. The era was over. The market would not recover. Welcome to the new normal.

Across M&A a critique developed to justify that sense of malaise. In October the New York Times’ and CNBC’s Andrew Ross Sorkin aired it in a column, summing it up as a plaintive question: “What if the slowdown in merger activity isn’t cyclical, but secular?” Others added psychological elements. Executives, directors and shareholders had been deeply scarred not just by 2008 but by corporate scandals and M&A miscues in earlier years. This supposedly produced a deep-seated attitude change toward M&A.

The secular critique begins with uncertainty. The years after the crisis were a period of upheaval that spawned periodic outbursts of anxiety. M&A has normally retreated during periods of market volatility and advanced on rising stock markets. In the backwash of the crisis, the stock market struggled to recover and volatility ran wild. Deals fell proportionally to levels familiar from other recessions, about 50 percent off the 2007 peak. Then came those uncertainties: Greece, Italy and Spain; the Tea Party, fiscal cliff and Treasury downgrade; political gridlock, the government shutdown, the Federal Reserve taper (or not); the emerging-markets slump.

Chris Ruggeri, a principal in Deloitte’s financial advisory unit and head of the firm’s M&A practice, draws a connection between uncertainty and the confidence to launch M&A initiatives. “We’ve been sort of stuck,” she says. “Confidence fuels growth. And growth fuels M&A. To get growth, you need confidence. It’s not there.”

It’s difficult to deny the impact of the euro zone crisis, particularly on global companies with European operations or trade relationships. Some of these aftershocks had direct effects: European M&A pretty much disappeared as the crisis spread, banks hunkered down and recession settled in, and emerging-markets M&A slumped as growth rates slowed.

Still, after several years these event-driven uncertainties began to resemble an empty cliché. There was evidence that the markets, at least, were growing more resistant to fear. Stocks famously did not crater over October’s government shutdown and the Republican threat to the debt ceiling. And in Europe asset values looked very cheap. As Scott Bok, CEO of Greenhill & Co., a firm dependent on M&A, says: “I was on TV recently, and they asked me what I tell clients about all these crises, and I said, ‘Well, I don’t think clients are all that focused on these crises.’ And they said, ‘What do you mean?’ I said, ‘Look at interest rates falling, gold prices falling, stock markets rising every day. No one is panicking.’ I think the word ‘uncertainty’ comes up when people are frankly making excuses for not doing something.”

Bok notes that global finance is by nature uncertain. “If I look at things that happened in my career, from the stock market crash to the dot-com bust to 9/11 to the European situation to the financial crisis, every 24 months there’s something that really surprises everyone. So if you wait around until a period of absolute calm before you do anything strategically, you’re going to wait a long time.”

But there are deeper levels of uncertainty that foster a less robust M&A regime. Market volatility can wreak havoc, undermining companies’ ability to get comfortable with equity valuations — to feel they really have a sense of the worth of the asset they’re buying. “What killed the M&A market in 2009 and 2010 was that people assumed there would be distressed sellers,” says Alan Klein, a partner at New York–based law firm Simpson Thacher & Bartlett and a longtime M&A adviser. “But they weren’t so distressed that they wanted to sell out at what they thought was the bottom. For a long time coming out of 2007, sellers thought they knew the value of their asset and resisted getting paid 20 percent or 30 percent less. As for the buyer, they would say, ‘I’m not going to look like a turkey in a few months because the market will have dropped and I’ll have paid a premium of 20 percent to the market high, which is going to look like 40 percent in six months.’”

That fear is hardly a surprise in a falling stock market. It’s harder to explain a dearth of deals in a rising market, however. Bok believes the Fed’s quantitative easing program, which has sent equities surging to record heights, has impeded the revival of M&A. “Usually, you think of rising share prices as positive for M&A,” Bok says. “I think now you find that when you’re talking to a potential acquirer about an acquisition, you’re talking about paying a 30 percent premium on stock that’s already up 50 percent year-to-date, in a market that’s up 20 percent. People have a sense, like investors, that there’s an artificial element to share prices, and they’re reluctant to pay a premium on top of a market that’s already high.”

Klein agrees. Outgoing Federal Reserve chairman Ben Bernanke, he says, has told the world that eventually the Fed will stop artificially supporting prices. He asks, “Am I going to be the one that buys right now, when in six months there will be a tremendous possibility that the market could settle down at a materially lower level and no one would think that something unexpected had happened?”

In theory, M&A should be a rational strategy for generating revenue growth in a slow-growth economy. Many advisers insist that boards and CEOs want to do deals and recognize the need to extend product lines or expand geographically, but they can’t seem to pull the trigger. One reason: Shareholders resist the near-term sacrifice that all but a few M&A transactions involve. Says Klein: “Can you imagine a CEO today going on CNBC and saying, ‘We’re really happy to announce we’re buying this company and it’ll cost us in year one, but by year three we’ll have turned it around?’ No one has any trust or faith in that at all.”

Consider the hurdles to any M&A deal at the corporate level. The board must struggle with equity valuations. It knows a deal will generate shareholder suits; they’re now nearly universal. And the board is fully aware that even in companies with internal deal-making units and an army of outside advisers, a major transaction involves an enormous expenditure of time, energy and money.

Then there’s the ubiquity of shareholder activists, which over the past decade have proliferated, accumulated firepower and increasingly gone after major corporations. Who wants to invite their attention? Earlier this year JPMorgan Chase & Co. über-banker Jimmy Lee and Blackstone Group CEO Stephen Schwarzman sat for an interview at a Bloomberg M&A conference. Lee raised the issue of activists. “Basically, what we’re telling our clients right now is that if you have a shareholder vote — if you have a transaction that you’re engaged in that requires a shareholder vote — you better just hit the pause button and think about it, know who owns your stock and have a great dialogue with those who do own your shares, and, of course, be the best that you can be in all these metrics.”

Lee compared contemporary activists like William Ackman, Carl Icahn and Daniel Loeb to the raiders of the ’80s. (Icahn falls in both camps.) Schwarzman agreed: “There are an enormous number of hedge funds, many of which we might not know their names.” He added, “We’ve seen this movie in the 1980s.” Schwarzman concluded by likening activists to Freddy Krueger from A Nightmare on Elm Street, drawing a quip from Lee: “Yeah, just remember how that movie ends.”

Accurate or exaggerated, a threat or a help, activists now pose a powerful countervailing force to corporate managers and boards, and they’re not going away. It’s a fundamental change, albeit one that has been rising like the tide and is in many ways a logical extension of shareholder governance. Activists have played a major role throughout the postcrisis period, when they have been aggressive proponents not of leveraged M&A — or any M&A — but of having companies leverage themselves to engage in buybacks, recapitalizations or dividends. After all, remarkably profitable companies are sitting on cash, and activists have asserted throughout this period their belief that they — shareholders — can better invest that cash than companies. (As one adviser notes, getting cash also directly boosts activists’ internal rates of return.)

Companies continue to heed that call. In its most recent report, in September, Factset Buyback Quarterly reported that the number of companies engaged in a buyback or a dividend over a trailing 12-month period had reached its highest point since 2005, some 71 percent of the S&P 500. The value of stock repurchases amounted to 63.3 percent of free cash flow (see also our Third-Quarter 2013 Corporate Buyback Scorecard).

The rage for buybacks and dividends brings us to a kind of ground zero of M&A: the belief that most deals don’t work out, that they waste shareholders’ money and that M&A is a devil’s brew of executive enrichment and Wall Street sophistry. This notion, fed by academic studies, stirs up the antipathy of activists. It’s so widely accepted that it’s rarely debated. Peter Clark, an American consultant and management professor at University College in London, refers to it in a new book as MMF — “most mergers fail” — capturing an idea that is reflexively accepted as fact.

This notion that most deals fail is today routinely trumpeted in the media, particularly since everyone’s favorite M&A disaster, America Online’s $165 billion acquisition of Time Warner in 2000. In fact, it was around that period that strategic — that is, corporate — M&A levels fell off, obscured by the historic surge of private equity, which drove the market higher and higher; so-called strategic deals have still not recovered.

For all its apparent certainty, the research on M&A is complex and ambiguous, reflecting calculations involving a bewildering range of inputs, many of which cannot be controlled like scientific experiments. How, for instance, do you measure not doing a deal? How do you judge deals that are done for qualitative reasons —say, to acquire a key technology — or reflect a changing view of the future? What’s the relevant time frame? The range of failure cited routinely in the media is all over the map, from 50 percent to 90 percent to “most” to “all,” with little explanation of what’s being measured — that is, the definition of failure. In his New York Times column, Sorkin offered in passing: “What if corporations have learned the lessons of so many companies before them that the odds of a successful merger are 50-50 or less?”

That’s a typical meme. In 2005, Robert Bruner, now a dean at the University of Virginia’s Darden School of Business, wrote “Where M&A Pays and Where It Strays,” a paper that attempted to get at how decision makers think about M&A. He focused on the studies and their regurgitation in the media, contending that declarations of M&A failure were “poorly grounded in the scientific evidence” and that M&A was often depicted as “homogeneous” when it was deeply heterogeneous.

Bruner described the “fact” of nearly universal failure, in whatever context, as representing “the conventional wisdom” about M&A. Today that perspective is a key part of the M&A critique. That conventional wisdom has been reinforced by macro uncertainties and feeds an aversion to M&A that is not easily dispelled.

There’s a kind of corollary to this wisdom that goes back to the ’80s and went on steroids after 2008. If most deals fail, then the motivation to attempt deals must be suspect. (This is another break with the ’80s, when CEOs who didn’t engage in M&A were viewed as entrenched and self-interested.) Corporate executives, particularly CEOs, are routinely characterized as driven by hubris or greed. They are blamed for overpaying for deals and failing to integrate properly.

Then there’s Wall Street, which critics routinely depict as exerting a Svengali-like sway over companies. Wall Street gets larger fees for larger transactions, thus providing a motivation to press for bigger deals. This produces another structural innovation many view as a permanent counterweight to M&A: the presence of internal deal-making units that can provide a sober, independent, non–Wall Street view, without the misaligned incentives of bankers (but with the misaligned incentives of executives). Some seeking an explanation for the M&A decline fix on the possibility that internal deal makers are reining in corporate adventurism.

This is debatable and, like much about the dynamic between Wall Street and corporations, smacks of a caricature. But it does add one more fundamental structural change to the M&A ecosystem and another explanation of why M&A has slumped and why it may not be coming back soon.

Few believe M&A will never rise again. Instead, some in an increasingly anxious M&A industry fear that deal making will remain stagnant for another year or more and that the good times — meaning a next leg of M&A expansion bigger than the last — will not return for them. Still, it’s difficult to argue with history, which displays recurrent periods of M&A cyclicality, beginning in the U.S. in the late 19th century. The real debate is about “when” and “how far is up?”

Just as there’s a psychological case for structural impediments to M&A, there is a historical case to be made for believing that, despite the gloom, M&A will eventually snap back like a bungee cord. Management professor Clark makes the case for historical continuity. He has written two earlier books on M&A and believes that another wave is already uncoiling. In fact, Clark and co-author Roger Mills announce it in the first line of the introduction to their new book: “Masterminding the Deal anticipates a resurgence of record M&A transaction volume in this decade.”

Their evidence? Clark and Mills take the reader on a journey through academic studies of historical cycles, mostly since the ’70s, from which they conclude that merger waves generally display four different phases, contain four key elements and last seven to nine years. The current cycle began in 2011, when, they say, many still feared a double-dip recession and deals often involved the acquisition of small companies for cash. The signature phase one deal was Facebook’s acquisition of Instagram for $1 billion in April 2012, immediately before Facebook’s initial public offering. Clark and Mills compare it to the 1996 Netscape IPO, which kicked off Internet mania.

In phase two, conditions ripen. Stock prices rise; financing becomes more available; and deals occur in stops and starts. But there is still resistance, and premiums are moderate, if growing. Clark and Mills view consolidation deals like Omnicom and Publicis, with $500 million in synergies and virtually no premium, as prudent phase two deals. In phase three, they write (their italics), “Everyone has arrived at the same realization: It is now safe to pursue deals again.” Phase four features steep premiums — some above the 40 percent red-alert line — and a scramble to get into the game before it ends. Transactions are increasingly financed with stock. The end is usually ugly.

Clark is convinced that the social media and e-commerce offerings that will follow Twitter’s — led by Chinese companies, like Alibaba Group and Sina Weibo, that can list on the New York Stock Exchange — will set off an acceleration in M&A.

All this makes it sound like good times are lurking around the corner. In fact, the pair dub this coming wave “Megaboom.” The only problem, which Clark acknowledges, is that the M&A numbers aren’t rising, even though they should be. Clark and Mills attribute that to the initial phases “marked by early acceleration for a few quarters followed by retrenchment,” which is “unsettling” to practitioners and the press. “Market direction is only straight up or straight down in the cartoons,” they note. But every quarter that passes requires more explanation.

Enter the “new normal,” a phrase Clark has appropriated to explain a cycle following a serious financial crisis and recession. He contends that a new-normal cycle has been created by Europe’s sovereign debt crisis, by the absence of financial firms from M&A (he believes bank consolidation will eventually revive) and by distortions and uncertainties created by QE. But those depressed levels will produce greater future volumes (see also “Ian Bremmer and Nouriel Roubini Unveil the New Abnormal”).

“Now that merger finance has become more normalized [after the boom years], with boundaries, that by itself will drive you to a lower level,” he says. “From this lower-based new normal, we can soar. But to a degree, if you are looking at the last merger cycle, you’re looking at the wrong thing. You didn’t have QE then; you didn’t have banks sitting it out.”

Clark agrees that the notion that most markets fail has put a brake on deal making. But as much as he accepts the validity of the consensus — he uses the two-thirds-fail number — and as deeply as he grasps the complexities of the studies, he also believes factors crippling M&A will give way to a renewed hunger for growth and risk. “There’s some point in the merger cycle where deals become safe again,” he says. “I’m not going to worry about the sharks. I’m going to go out and do deals.”

That’s a psychological inflection point — the swing from fear to hope, the resurgence of confidence and animal spirits — that’s often passed over as a mysterious market process: A bull market dispels old negative thinking and replaces it with something shiny, bright and new. As Clark says, channeling Kenneth Rogoff and Carmen Reinhart’s book on financial crises, “This time it’s different.” It’s what the University of Virginia’s Bruner calls the deal makers’ “frame of reference, or beliefs that help you decide whether specific deals represent the average or what statisticians call the ‘tails of the distribution.’”

The start of a new cycle is gradual and rational. Greenhill’s Bok puts himself firmly into the cyclical camp. “M&A slowly comes back, but only with the safest, most synergistic transactions,” he says. “If you look at where we are in 2013, what’s interesting is that the stock market has reacted very positively to acquirers in these transactions. You’re seeing a lot of acquirers’ stock going up. That, to me, is the definition of the early stage of the M&A cycle. We’re at a point [now] where people are brave enough that they are either divesting or fine-tuning what they own, getting to businesses with the greatest growth potential or, on the acquisition side, [doing deals that are] very accretive, with little strategic risk.”

Despite lousy M&A numbers, there are signs that barriers may be weakening. Markets have supported low-premium deals, particularly consolidation plays, though there’s little this market hasn’t favored. Megadeals seem to be back. More important, market commentators have noted that multiples and earnings per share are outpacing revenue growth. Where will top-line growth come from? There aren’t a lot of choices: either organic growth, which has also been starved for capital, or M&A.

But what about those activists? That ever-so-pragmatic bellwether Icahn suddenly warmed to M&A in the third-quarter report for his publicly traded vehicle, Icahn Enterprises (IEP). After ritually beating up on “mediocre senior management and non-caring boards,” he made the case for acquisitions. “I believe that the greatly increasing need for a catalyst to make acquisitions possible and to make mediocre managements accountable will be of meaningful benefit to IEP in future years,” he wrote. “As a corollary, I expect that low interest rates will greatly increase the ability of the companies IEP controls to make judicious, friendly or not so friendly, acquisitions.”

But can the psychological fortress based on the conviction that most mergers fail be so easily undermined? Well, there are cracks. As Bruner suggests, measuring merger performance in a complex environment is a lot more difficult than people assume. That’s not to say that M&A is not risky and challenging or that large-scale mergers that make transformative claims don’t regularly fail, sometimes spectacularly. Bruner himself wrote a book titled Deals From Hell.

But M&A risk is only a part of a much larger picture. As Bruner notes, “All business is risky.” Most capital projects, from new business lines to R&D, fail as often as a solid major league hitter. Deals done in moderate markets with small premiums for cash tend to fare better than transactions done in hot markets for high premiums and stock. This is the paradox of M&A: The best deals occur in the lousiest markets. There’s no question that friendly deals are safer than hostile deals. Smaller deals are more prudent than bigger deals — particularly, smaller deals as part of a campaign to build out a business. But smaller, low-premium acquisitions in similar businesses with easy costs to cut — synergies — or large no-premium mergers that involve consolidation can’t get much safer, at least financially.

Bruner asserts that contrary to the notion that most deals fail, “the market for M&A pays about as well as investors require. Deals get done at prices that offer an acceptable rate of return for the risk.” He’s convinced that many companies that succeed with M&A keep their successes close to the vest, not willing to “advertise” their wins to the government or to competitors. “M&A,” he declares, “is not a loser’s game.”

All of that tends to get swept aside by the dismissive mantra “most mergers fail” and in the kind of reductionist characterizations that swirl around public companies. Beneath the surface there’s been more contention over these merger studies than is reflected in the conventional wisdom. That’s not to say the M&A record is stellar or that deals do not involve risk — sometimes crazy risk. It is to say that data is ambiguous and tricky to interpret and can be, strategically at least, beside the point.

In a shareholder-centric system, M&A is both risky and sometimes necessary. For more than a decade, consulting firm Bain has questioned the consensus on merger failures. Bain attacked the issue differently from the academics. Rather than try to quantitatively fix the success or failure of individual deals, the firm compared companies that regularly engaged in M&A with those that didn’t. In a global study released in early 2013 that tracked 1,600 companies and 18,000 deals from 2000 through 2010, Bain asserted that companies that did more deals in a repeatable fashion fared better by several percentage points than those that did not. “Companies that were actively engaged in M&A outperformed inactive companies not only in TSR [total shareholder returns] but in sales growth and profit growth as well,” said the study. Bain came to two conclusions. First, frequency mattered. The more experience a company had in M&A, the better its chance of success. Second, materiality mattered. The larger the cumulative size of a company’s deals compared with its market value, the better the performance was likely to be.

Companies that did relatively few deals but still had a large part of their market value coming from M&A — meaning they made infrequent, big bets — fared more poorly. These big bets included much-derided transformational deals such as AOL Time Warner. The lesson Bain took from all this: Companies that built their growth around “repeatable” transactions performed better. Experience means something.

David Harding, co-head of Bain’s global mergers and acquisitions practice, believes companies have undergone a learning curve on M&A. “Prior to the ’80s deal making was a de minimis part of the corporate strategic war chest,” he says. “Starting in the ’80s and ’90s, M&A became part of normal strategy. Trying to understand how to do a deal well is relatively recent. But companies now have lots of experience.”

Bain’s research pushes the cyclical scenario further. Whether companies like it or not, the firm argues, they will find themselves driven to M&A by powerful global trends, from a billion more consumers to the need to spend on human capital and infrastructure. Capital, Bain says, is now “superabundant,” pumped out by China, India and other emerging nations as they build their financial sectors and by central banks intent on stimulus. “Capital,” Harding says, “is the oxygen that drives the M&A regime.” Those financial assets will produce continuing low interest rates and low inflation and feed the growth of asset bubbles.

Most important, investors will demand performance. Bain calculates that U.S. companies grew, on average, 6 percent a year from 1995 to 2011. But the firm’s research concludes that investors expect companies to generate earnings per share of 12 percent annually. Companies can pursue organic growth, increasing capital expenditures to nurture new businesses, but it’s unlikely to generate enough total growth. Only M&A, with all its risks, can fill that gap.

Skeptics can question aspects of Bain’s thesis, from the calculation of investor expectations to whether correlation (lots of M&A) is causation (high performance) and whether financial assets and M&A are necessarily linked. And even Harding admits that the potential for asset bubbles could generate more uncertainty and feed conservative tendencies. But he is convinced that pent-up demand for growth and performance will only rise, driving M&A.

None of this makes M&A any safer, just necessary. What matters with these challenges to the conventional wisdom is not that they’re right but that they exist at all. When markets swing, when conditions ripen, those responding to new market demands — executives and directors, mainly — will find them and act on them.

But when? It’s January, and views on M&A remain as mixed as the weather. The euphoric Twitter IPO has receded, and occasional megadeals that loom into sight — the reported interest of Charter Communications in Time Warner Cable (a deal that might require $25 billion in debt) — can’t erase the fact that there aren’t enough transactions to keep everyone busy. Still, in the face of record U.S. stock markets, equity strategists and money managers are talking about greater slugs of capital going into M&A — even in Europe as it edges out of recession. Yet a disconnect between current realities and a brighter future persists as we enter year six of the M&A downturn.

Timing in finance is always difficult. What kind of pressure will a Fed taper apply to the market? Will Europe hold together, and will Prime Minister Shinzo Abe succeed in restarting the Japanese economy? Will China go boom or bust? How long can companies cut costs and pay off shareholders before they have to embrace more-dynamic strategies — or face the same activists who once nixed thoughts of M&A?

Longtime M&A lawyer Lipton takes an Olympian view befitting a man who has seen it all. He does not seem to believe the era is over, but he is not a fortune-teller either. When asked about the state of M&A and whether it’s coming back, he chuckles, retreats into his office and reappears with two sheets of paper. “Over the years I’ve gotten that question a lot,” he says in his distinctive gravelly voice. “I give this to people when they ask.” The memo lists 25 factors that “significantly affect mergers” while noting that “the interrelation of all or some of these factors creates the permutations and combinations of issues that at any given time make it impossible to predict the level of future merger activity.”

In other words, a warning: Past performance is no guarantee of future results. • •