29th September 2015 by The Value Perspective
By Andrew Williams
It has only been a month since we last wrote about the significant increase in merger and acquisition (M&A) activity in 2015, suggesting in Get your coat that this was perhaps not the unalloyed good news some commentators were suggesting. Things have been moving so fast, however, that you might perhaps even be surprised it has taken us this long to return to the subject.
Observing in May, in Mind the gap, the difference between the $2.8 trillion (£1.8 trillion) of M&A then going on in the world and the $4 trillion of activity happening the only other two times the global stockmarket had been as high, we raised the possibility that “maybe this gap will be filled”. Well, apparently there was no “maybe” about it and the speed at which the gap has filled has been staggering.
Take a single day – 8 September 2015 – on which, according to this Financial Times article, no less than $40bn of new M&A transactions were announced, including a $12bn utility deal by Hong Kong tycoon Li Ka-shing, an $8bn bid by one Australian oil business for another, Blackstone’s $6bn deal to buy Strategic Hotels in the US and Mitsui Sumitomo’s $5.3bn bid for UK-listed insurer Amlin.
As it happens, the FT article is packed full of ‘fun facts’ about the current state of M&A. Despite, for example, that gap at the start of the year, 2015 now looks set to be a record year for M&A while, even as things stand, the 8 September announcements took the total amount of transactions since January above the $3 trillion mark – the highest total since 2007, according to Thomson Reuters.
Flurry of deals
The FT piece also notes how “the flurry of big deals in Asia-Pacific” on 8 September pushed the region’s annual M&A tally past $700bn for just the second time on record, according to Dealogic, while another line that caught the eye was: “A further sign of the robustness of the M&A cycle is that a growing number of companies are pushing ahead with contentious hostile bids.”
To our eyes, taken cumulatively, all these points start to look not so much ‘fun facts’ as ‘red flags’. Indeed, arguably one of the most striking aspects of this latest surge in M&A activity is that it seems to be occurring almost in spite of the global market volatility and generally poor investor sentiment that has been evident since China devalued its currency in mid-August.
The point is not lost on the FT, which notes “the market swings have not been severe enough to clog what bankers say is one of the most robust pipelines in generations” before offering one last fact (or flag): “Last month, with more than $300bn worth of deals announced, was the busiest August in US history, as M&A activity hit $1.46tn so far this year, surpassing overall transaction volumes in 2014.”
Here on The Value Perspective and as we implied in Get your coat, few things make us more nervous than bubbly levels of confidence – whether that be among investors or, as here, among company management. Widening the scope of potential causes of unease, however, is this M&A boom further evidence of an overconfidence among central bankers – a possibility we touched on in Bonderland?
You may of course feel that central bankers would be justified in feeling pretty confident – after all, it was their programmes of quantitative easing (QE) that appear to have saved the global economy from ruin. Since March 2009, for example, the MSCI World index is up some 150% in US dollar terms while the S&P500 is up around 200% on the same basis.
Whatever it takes
Certainly, over the last six years, it has paid to go along with the idea the central banks would, as European Central Bank president Mario Draghi famously put it, do “whatever it takes” to rescue financial markets, and investors have become used to policymakers acting to suppress market volatility whenever it has arisen.
This has, however, given rise to a perverse consequence as many investors have moved on to become apathetic towards evidence of building risks in the global financial system. What is more, they appear to be growing ever more comfortable with – or at least content to misprice – the risks associated with taking on elevated levels of debt. The same holds true for companies involved in M&A activity.
In Bonderland, we reminded you of the words of former Citigroup boss Chuck Prince, who in 2007 dismissed fears of loose lending standards with the infamous line “as long as the music is playing, you’ve got to get up and dance”. Today, those providing the music – that is, the policymakers at the world’s major central banks – appear to have little desire to lay down their instruments.
Yet it seems unlikely QE and ultra-low interest rates will prove exceptions to the rule that nothing lasts forever so one day the policy making band’s strings must break or they must run out of puff. For now though, The Value Perspective can only look on as overconfidence continues to breed complacency – among investors and companies alike – and the M&A boom apparently carries on regardless.