analysis
THE INVESTOR
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Balance sheet
After a period of relative corporate inactivity during the financial
crisis, the second half of 2013 saw a flurry of major mergers, acquisitions and IPOs
– with companies and investors displaying renewed confidence in investing, 2014
could see further deals on the table.
observers think that the gradual withdrawal of the QE life support
mechanism could actually encourage corporate activity.The very
low interest rates that have accompanied QE have allowed some
of the weaker companies to continue in business; as the global
economy reverts to more normal conditions, these weaker
businesses could find it harder to survive and become takeover
targets for their stronger rivals.
The return to corporate activity is also an indicator of the health
and confidence of the corporate sector. Companies have spent the
five years since the banking crisis erupted paying down debt,
cutting costs and repairing their balance sheets.The result is that
many of them are now in a good position to take advantage of the
tentative signs of recovery by expanding their businesses. One of
the ways to do that is to acquire rivals.
An analysis by Deloitte, which compiles a quarterly mergers
and acquisitions (M&A) index, shows that the constituents of the
S&P 500 and the FTSE 100 indices had average cash balances of
$3.6 billion in the middle of 2013 and are generating an average of
$476 million each year.
‘With the economic environment in the US and Europe improving,
Deloitte expects corporate confidence to increase, and for companies
to pursue growth through M&A,’ the analysis reports.‘A steady
recovery, both in optimism and the economy, across developed
markets, is expected to drive the uptick in M&A deal volumes.’
Ernst &Young, which does a similar analysis of the IPO
market, thinks that the rise in corporate confidence will also
fuel an increase in new issue activity. It found that fewer IPOs
were being postponed in 2013 than in 2012 and that the
majority of deals were priced at, or above, expectations – an
improvement from the worst days of the financial crisis when
prices were low and some proposed IPOs were abandoned
because of market nervousness.
While a healthy IPO and M&A market depends on a buoyant
stock market, such deals can also be positive for the stock
market as speculators bid up the price of companies that
they think could attract deals, and the publicity surrounding
new issues draws attention to the attractions of equities.
These attractions, which are particularly pronounced thanks
to the current low-interest-rate regime with deposit rates
generally well below the level of inflation, are likely to remain
for some time.
Of course, not all M&As are good news for investors in the
long term – the purchase of ABNAMRO by Royal Bank of
Scotland just as the financial crisis erupted surely ranks as one
of the worst deals ever. But the current market is a long way
from the frothy conditions of that time – so frothy, indeed,
that RBS was actually vying with Barclays to acquire ABN.
Today’s deals are based on solid industrial logic rather than
grandiose ambitions.
