FACULTY Q&A

E. Han Kim, professor of finance and international business at the University of Michigan’s Ross School of Business, forecasts a continuation of the record numbers of mergers and acquisitions that took place in 2015. Contact: 734-764-2282 or ehkim@umich.edu.

Q: Before Dow Chemical and DuPont announced a merger, companies reported $4.35 trillion in deals, according to Dealogic. Will M&A activity slow next year?

A: I think the M&A party will continue, because the factors driving this activity will still be there for the foreseeable future. First, companies have a lot of cash on hand. They’ve been hoarding it for some time, and it eventually has to go somewhere. Second, interest rates are at record lows so financing is cheap. Third, you’re still seeing tax-inversion deals like Pfizer’s acquisition of Allergan, which is based in Ireland where taxes are lower. The corporate tax rate in the U.S. is still one of the highest in the world, so unless that changes, there’s still an incentive for tax-inversion deals.

Q: The Federal Reserve is expected to boost interest rates soon. Would that slow down merger activity?

A: Probably not. If they raise it a quarter of a percent or half a percent, you’re still looking at historic lows. The yield curve indicates a market consensus that the benchmark interest rate will stay in the 3-percent-to-4-percent range for the long term. There’s still so much cash sitting in company coffers and so much liquidity in the market.

Q: What are some factors that could change the landscape and put the brakes on deals?

A: One of the biggest concerns is China’s economy. The growth rate there has slowed, and that’s the second-largest economy in the world. It has a huge influence on the rest of the world. Big deals also inevitably raise antitrust concerns, so regulators could start taking a harder look. And that might not be unjustified. One of the concerns I have about so many big mergers—which has been a topic of my research—is that they sometimes reduce competition, leading to significantly higher prices for consumers. My research on airline consolidation has shown that prices went up substantially on routes where mergers led to fewer competitors.