Spending Money

22/02/2013 at 5:19 pm

A month ago we looked at stock market earnings, observing that strong growth in reported EPS was an important boost to sentiment. And this month has seen signs of a rebound in merger activity. (Stock markets, of course, like to see companies spending money on takeovers at least as much as they like to see them making it to begin with.)

Liberty Global’s offer for Virgin Media is set to be one of the biggest UK deals of recent years. Over the Atlantic, plans were announced to take Dell private, and days later, Warren Buffett and buyout firm 3G Capital revealed they had got together to gobble up Heinz.

In fact, Bloomberg data shows that over $190bn worth of deals have been announced so far this month. That’s comfortably above the monthly average since the recession began in 2008, and continues the trend of increased deal flow following the 2011 stock market crash.

The specifics of these deals remind us that it isn’t just stock markets and investment banks that like takeovers. As well as the Heinz deal, private equity firms are lining up behind the Dell buyout and others. The legal profession benefits too: Virgin, Dell and Heinz are all being sued by investors.

Finally there are the companies themselves. Last year saw balance sheet cash and cash equivalents per share for the MSCI World Index of developed country stocks reach yet another record high. It may be a truism of the modern era that most acquisitions fail to add shareholder value, but even the most hardened cynic would agree that some takeovers do represent a worthier use of managerial imagination than writing cheques to investors.

We have grown used to years which get off to false starts. But there is a chance that the corporate cash pile and the resurgence of equity investment could add up to something materially constructive in 2013.

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