Could renewed enthusiasm for M&A support the stock market in 2011?

18th January 2011


Merger and acquisition activity fell out of favour in the aftermath of the credit crunch. Too often it was seen as the means by which ego-driven executives lined their own pockets. But now, having deleveraged, companies are finding themselves with plenty of cash on their balance sheets and looking for a place to spend.  

Could a renewed enthusiasm for M&A act to support the stock market over the next year?

The early signs of a new zeal for deal-making have been seen in the wrangling over Smith & Nephew. Although rumours have not been officially confirmed , Johnson & Johnson was speculated to have made a bid before Christmas.

Last week according to The Telegraph it was Biomet's turn. It has to be said that a proposed takeover has not met with whole-hearted approval. Chris_xxxx says on the Telegraph site: "Here we go. City boys want to make money so let's sell another British manufacturer. So the choice is to be bought by a US conglomerate or merge with a company saddled with billions of debt." It is clear M&A is still controversial.

There are certainly a few other groups who see a tentative return for M&A activity: . As Frank Aquila points out in this article , , businesses have the cash to undertake M&A activity with around $3trillion in cash reserves. It is less daunting than attempting organic growth in the current environment and there are also a lot of cheap assets around.

Aquila highlights a survey of 150 global businesses conducted by Thomson Reuters and Freeman Consulting, which suggested that worldwide M&A activity would increase 36% in 2011. The FT highlights some of the key global deals this year:

If this happens, it should be good news for shareholders. Markets are more discerning about the type of deals that will push up a share price – gone are the days when deals drove share prices as a matter of course – but there is no doubt that a new buyer is supportive for share prices.

This could be a key selling point for some areas of the market in 2011. Smaller companies, for example, are usually among the first beneficiaries of M&A activity. Gavin Oldham, chief executive of the Share Centre, says in his predictions for 2011: "The service sector and mid/small caps will continue to do well on the back of potential merger and acquisitions activity: we favour Carillion, Centrica, Prudential and CPP." Nevertheless, as the Smith & Nephew deal shows, larger capitalisation stocks also stand to benefit.  

It may not be universally welcomed, but there seems little doubt that merger and acquisition activity is, tentatively, back. These are not boom years and – in the short-term at least – there are unlikely to be the testosterone deals of 2007, but it may be a valuable support to the stock market in 2011.


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