More deals expected as M&A returns to fashion

Published Jun 23, 2014

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Low interest rates were stoking the fires of takeovers, with about a quarter of big groups now on the lookout for targets in the next 12 months, a study found.

The signs were clear “that plans for transformational acquisitions are accelerating”, consultancy EY concluded.

The pharmaceutical sector had led the way so far this year with mergers and acquisitions (M&As) worth $150 billion (R1.6 trillion), according to consultancy Dealogic, and that did not include the failed bid by Pfizer for AstraZeneca.

Much of this is driven by a need to grow and cut costs to counter the expiry of some patents on high-earning drugs, analysts say.

The EY assessment backs up the view analysts have held for some time that ultra-low interest rates is one of the main factors fuelling interest in takeovers.

Other forces are at work as well: during the financial crisis beginning in 2008 and the subsequent euro zone debt crisis, many big companies restructured their businesses and hoarded cash.

But now many are gaining confidence in the recovery and are looking to expand by buying other businesses.

EY interviewed 1 600 executives in companies in 54 countries. It found the number of big groups willing to launch takeovers of than $500 million had doubled in 12 months to 27 percent of the total. Those willing to do deals of more than $1bn had doubled to 12 percent.

Their willingness to take on debt to finance deals was the highest for five years.

Many companies are under pressure from aggressive shareholders to cut costs, and this could make boards highly selective in looking at targets.

“After a prolonged financial crisis and M&A market malaise, companies and boards are opting for quality rather than quantity,” Rudy Cohen Scali, EY’s head of merger and acquisition activity in France, said.

Recently, US and European companies had led activity in M&As, but emerging companies could begin to play a significant role, led by China and India, the report said.

“The top five investment destinations balance emerging markets such as India and China, with a continued focus on mature markets such as the US, UK and Germany,” it found.

The EY report said “30 percent of executives perceive global political instability to be the greatest economic risk”.

With the crises fading and despite sluggish growth “there is liquidity waiting to be used”, a portfolio manager at Barclays Bourse in Paris, Renaud Murail, said last month. “American companies have accumulated huge war chests,” he said.

But Michael Hewson, the chief market analyst at CMC Markets UK, contested suggestions that the upsurge of M&A activity reflected renewed confidence in parts of the global economy, saying that one driving factor was a search by US companies to use their piles of cash abroad in a way that would not attract tax if the money were sent to headquarters in the US.

This raised questions about “the value and reasons behind these deals”, he said. – Sapa-AFP

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