Deal Making

23/05/2014 at 5:53 pm

A little over a year ago we looked at nascent signs of a revival in merger and acquisition activity, noting that a continued pickup last year would be both a symptom and cause of improving sentiment in equity markets. So it proved: global deal count, transaction value and average premium paid all increased on 2012, and we know what a great year for the major equity markets it turned out to be.

This year the takeover pattern is much stronger. Much attention has been given to the huge offer made by Pfizer for AstraZeneca; despite its recent rejection by the target’s board, major shareholders have understandably been calling for the arm-wrestling to continue. Including this deal the total volume of transactions announced so far this year would reach well over $1.6trn – but even putting it aside, other deals have reached $1.5trn, which compares to $1.2trn for the first two quarters of last year (and remember, we’re just over half way through Q2). In fact the Q1 number of $835bn was the highest recorded over any quarter since the middle of 2008.

Inevitably it is not just the mega-cap deals which go to make up this number. There has been a lot of activity in the mid-cap space too, across a range of regions and sectors. The Dixons-Carphone merger is a good UK example; there have been some similar-sized private equity acquisitions; and perhaps most interestingly, the pace of sizeable outright purchases from corporates has picked up too. In the $3-5bn area there has been predictable buying from giants such as Apple and Google, but also from such diverse enterprises as Sun Pharma, Fiat and Rolls Royce.

There is a lot of sideways profit making from this activity. The investment banking fees for the Pfizer-AstraZeneca deal were estimated at about $300m. And inevitably, there are legal fees and the occasional bitter lawsuit to throw into the mix too. This tends to put some extra zing in the step of those at the institutions which benefit from the flow, and in itself certainly does sentiment in the financial world no harm.

But this blog’s bigger interest is in the broader market picture. We know that equity markets got 2014 off to a choppy start, though returns to many asset classes have been unspectacular in either direction over the whole year to date. Continued strength in M&A activity, however, suggests that corporate confidence has not been affected. And it is good to see some of that fabled “cash sitting on balance sheets” being put to work. Again, this cuts two ways: business investment can stimulate growth, and increasing growth gives businesses the confidence to invest.

This is not to say that markets should have been more aggressively positive this year. But it would surely be foolish to dismiss the flow and value of M&A deals as irrelevant. What we should perhaps draw from this information is that in considering the various ways forward for the pricing of risk, increased corporate activity is a constructive signal; and with all appropriate guardedness, this could mean that the current stagnation will turn out in due course to have been a pause in certain trends rather than a drawn out reversal.

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