viernes, 22 de agosto de 2014

viernes, agosto 22, 2014

Smart Money

August 20, 2014 9:21 am

M&A boom must evolve to create growth

Expansion in labour and investment must be the aim of mergers



Huge cash buffers, together with cheap and plentiful financing, are fuelling a merger and acquisition boom that has delivered sizeable windfalls for investors. To sustain these gains, however, real economic growth will need to materialise from what, at least so far, remains a phenomenon dominated by financial engineering and mostly short-term objective maximisation.

The numbers are unambiguous. After a hyper-cautious period triggered by the trauma of the 2008 global financial crisis, companies are increasingly putting their record cash holdings to workso much so that the herd instinct has shifted from prudent accumulation to concern about being seen to be just sitting lazily on cash.


The result is an accumulation of M&A activity that could end this year double that of last year and approximating a level last seen in the boom days of 2007. And, judging from recent deal announcements, not even the derailment of big acquisitions such as Time Warner by Fox and T Mobile by Sprint and SoftBank acts as much of a deterrent.

The great enabler is the multiyear string of strong corporate profitability achieved through a combination of higher revenue, improving productivity and substantial cost savings. According to data from the US commerce department, at $1.7tn, after tax corporate profitability in 2013 amounted to a record share of GDP. Given developments so far this year, the 2014 levels are likely to be even higher.


Investing cash reserves


Initially, a significant portion of the record earnings was retained and deposited in bank accounts by boards and chief executives still traumatised by the 2008-09 near-death experience caused by the credit freeze that followed the collapse of Lehman Brothers and the Great Recession that ensued. But with ultra low interest rates depressing the income earned on this cash, companies found it increasingly difficult to resist calls for better deployment of record cash reserves.

As activist investors put even greater pressure on managements, companies started giving more money to shareholders through higher dividends and stepped up share buybacks. More recently, they have also engaged on an M&A boom, taking advantage of two other important enablers: readily available loan and bond financing and cheap borrowing terms.

As powerful as these enablers have been, they are yet to trigger the scale and scope of activities that materially improve the overall prospects for the economy and increase overall prosperity. Specifically, the corporate motivations underpinning the M&A boom have been much more defensive than offensive.


Very few deals have been driven by ambitious and realistic expansion plans, rather they are motivated by the desire to squash competition, especially that coming from smaller companies that do not benefit as much from cheap financing and ample cash, or by “inversions” that allow companies to reduce tax liabilities through a change in legal domicile. As such, the resulting economic gains for society pale in comparison to the financial gains that materialise for two particular groups.


Consolidating gains

First, are the facilitators of dealmaking. These teams of investment bankers, lawyers and accountants walk away with substantial fees and business referrals.

Second, financial investors whose gains are ranked as follows, starting with those earning the most: (i) shareholders in companies that are being taken over at a significant premium to their market prices and, sometimes, to almost all conceivable measures of their net present value because they allow for gains elsewhere (eg, reductions in tax liabilities or the elimination of downward pricing pressure); (ii) skilful M&A arbitrageurs who capture the value convergence between the acquiring and acquired companies; and (iii) the equity market as a whole, which benefits immediately and directly from higher demand emanating from the accelerated infusion of corporate cash and the rise in debt issuance (which, by the way, de facto subordinate bond holders who, currently obsessed by a search for yield, seem not to notice or care).

To maintain and consolidate these gains, the current M&A boom needs to evolve into something more meaningful in terms of production expansion, labour hiring, and investing in new plant and equipment. Absent is that it could well go down in history as yet another M&A bust. Should this materialise, the costs are unlikely to be incurred by the deal facilitators nor the sophisticated investors and arbitrageurs who are quite good at exiting before the bust. It will be incurred by the average investors, especially those being sucked in late by all the market chatter that M&A booms fuel, as well as by economies that would risk facing yet another headwind to growth and job lift off.


Mohamed El-Erian is chief economic adviser to Allianz, chair of President Barack Obama’s Global Development Council, and author of “When Markets Collide”


Copyright The Financial Times Limited 2014

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