Can the M&A boom continue?
A deal-making frenzy has accompanied the rise in global stock markets. Provided the world economy avoids a damaging outbreak of protectionism, mergers and takeover activity looks likely to remain buoyant.
A hallmark of global stock markets in the past few years has been a surge in corporate mergers and acquisitions (M&A). Deals worth a total of $3.6 trillion were agreed last year, the second-highest volume since the global financial crisis.
One high-profile case was US telecoms giant AT&T’s $108 billion purchase of media group Time Warner. Meanwhile, British American Tobacco offered $58 billion for a stake in rival Reynolds American that it didn’t already own.1
This year is proving equally busy, particularly in the UK. Here, rising business confidence, buoyant share prices and the sharp fall in the value of the pound following the EU referendum vote last summer have boosted M&A activity.2
Can this global trend continue, and what does it mean for investors?
A question of confidence
M&A activity is partly a question of corporate confidence in the economy, and the political environment.
Globally, the economy has gradually improved since the financial crisis in 2008-2009. There is now growing optimism over a jump in the growth rate in the US, thanks to President Trump’s planned fiscal stimulus. The administration’s intention to reduce corporation tax bodes especially well for corporate profits.
While the recovery in most advanced economies is now looking increasingly solid, economic growth have been relatively lacklustre compared to the pace seen in the 1990s and 2000s. This has helped underpin M&A, because some company bosses have decided to combat slower growth by taking over rivals, thereby giving profits a quick fillip.
Another key feature of the post-crisis world is historically low interest rates, providing cheap credit that companies can use to take over their peers. When share prices are rising, it’s also generally easy for firms to issue new shares to fund a takeover.
A boost for M&A in Britain
The British economy has defied expectations of weakness following the Brexit vote. Earlier this year, the government increased its forecast for growth in 2017, after being too pessimistic in the wake of the EU referendum.3 Stock market confidence is rising, with the blue-chip FTSE 100 index hitting new all-time highs recently.
This growing optimism has contributed to a sharp rebound in M&A activity recently, with much of it driven by British companies agreeing deals with each other. However, some of the highest-value takeovers since the referendum have come from foreign buyers.
The fall in sterling – it has slumped by almost a fifth against the dollar since 23 June – has made British assets cheaper for foreign buyers.4 Last July, Japan’s Softbank pounced on Britain’s largest technology firm, ARM Holdings, with a $31 billion offer. A cheaper pound may also have facilitated the takeover of Sky by America’s Twenty-First Century Fox.5
The UK could therefore be among the busiest market for bids and deals in the next few months, therefore reinforcing the bullish mood for shares.
Can the global M&A boom continue?
This may suggests that the M&A boom can continue for a while, but it could be derailed. One issue could be the rising tide of protectionism, which may encourage governments around the world to shield local companies from foreign takeovers.
A bout of economic or political uncertainty, or heightened regulatory scrutiny, could temper enthusiasm for M&A. The value of global deals that were agreed but then withdrawn or blocked reached an eight-year high of $805 billion last year.6
While the weak pound has made British companies attractive to overseas rivals, the recent $143 billion bid for London-listed Unilever by America’s Kraft triggered strong political resistance over its possible impact on jobs. Kraft eventually withdrew its offer.7
Rising interest rates could also dampen enthusiasm for credit-fuelled takeovers. The Federal Reserve, the US central bank, is expected to make further increases in interest rates this year, as it moves to normalise monetary policy.
Meanwhile, although the economic backdrop is still benign, the size of recent takeover bids suggests that we may well be closer to the end of the market cycle than the beginning.
Bids and deals tend to boost overall market confidence, and can cause a jump in the share price of the target, as a predator wanting to acquire a rival usually must pay a premium to its market value.
As stock markets rise, confidence grows and can develop into overconfidence. Chief executives may be increasingly inclined to pursue what they hope will prove to be game-changing deals.
This may be why we often see massive deals at or near the top of the market. In January 2000, dotcom giant AOL merged with Time Warner for $164 billion. And Vodafone took over Germany’s Mannesmann for $180 billion,8 still the biggest deal in corporate history. Shortly afterwards, the dotcom bubble burst.
Despite these potential issues, the outlook for global M&A remains broadly positive, and should continue apace in markets like the UK.
Barclays also does not expect the global business cycle to end in the near future.9 Interest rates may well rise in the US, but they will stay at historically low levels, so the incentive to borrow to acquire may not sustain much damage. This implies that the increases in share prices, and M&A activity, can continue.
How Barclays can help
One way that investors can gain exposure to the boom in M&A activity is by holding UK and global equity funds as part of a diversified portfolio.
Equity fund managers may look for possible M&A targets as part of their overall investment strategy. As the shares of companies that become the subject of a bid often bounce strongly, the managers who correctly identify acquisition targets can boost their returns.
Fund managers and their research teams may hold companies that are looking to buy rivals, with activities that complement their own, so that they can extend their market presence and build profits. Underperforming companies can be takeover targets too: private-equity firms may target them to restructure their operations and assets and make them more efficient.
Bear in mind that takeovers are not always successful, however. They often fail to add value over the long term because the acquirer overpays, so its share price can suffer. There are no guarantees, and there is no such thing as a fool-proof investment strategy.
Even so, a wide variety of global and UK equity funds may consider potential takeover targets when designing their investment portfolios. Equity funds will also tend to benefit from any overall market confidence boost fuelled by M&A and speculation over further deals.
Bear in mind that our referring to markets, investment strategies or stocks does not constitute advice or a personal recommendation to invest in these or any other investment.
Investments can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance.
1 Bloomberg, Wait? What? The M&A Boom is Back (October 2016)
2 The Times, Merger deals to hit $70bn in Brexit strategy boost (March 2017)
3 The Telegraph, Bank of England upgrades 2017 growth forecast –but pound tumbles as Mark Carney cautions Brexit still has consequences (February 2017)
4 This is Money, Sterling's plunge sees Japanese and US firms lining up to swoop for 'cheap' British firms (August 2016)
5 BBC, 21st Century Fox in bid approach for Sky (December 2016)
6 growthbusiness.co.uk, M&A 2017: Down but not out (February 2017)
7 The Guardian, Kraft Heinz withdraws Unilever takeover bid (February 2017)
8 The Motley Fool, The Investable Social Media Sector Might Be Getting a Whole Lot Smaller (October 2016)
9 Barclays, In Focus, Are European companies inferior? (March 2017) [PDF, 772KB]
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