Just when some of us were gleefully banging nails
into the coffin of almighty investment banking, the Masters of the Universe have received two apparent shots in the arm: Corporate executives around the world are rediscovering the itch for mergers and acquisitions, while Chinese authorities are unleashing the country’s IPO market after a 14-month hiatus. All the more reason for ordinary investors to keep a close eye on their wallets.
Captains of industry worldwide are flush with cash and credit, confident about the future, and raring to buy up competitors as “organic measures alone may no longer meet growth mandates.” That is the firm conclusion of a semiannual survey published by EY, the consulting firm formerly known as Ernst & Young, called the Capital Confidence Barometer.
The shift in mood from a year ago is striking among the 1,600 fat cats EY polled in 72 countries. Fully 65% of respondents think the global economy is improving, compared to 22% in October 2012. Accordingly, the managers’ minds have turned to expansion: 58% list growth as their organization’s main focus, up from 41% 12 months ago.
Add in the gushers of easy money still on offer from banks and bond investors -- 48% of execs said access to credit is improving, up from 26% in 2012 -- and you get a perfect storm for a new batch of mergers and acquisitions. More perfect than it has been since the crash of 2008, at any rate. EY found that 69% of the c-suite crowd expect an increase in deals going forward, and one-third plan to participate themselves. The results “suggest a return of deal activity after a five-year period of falling M&A globally,” the consultants conclude.
Meanwhile in Beijing, the Chinese Securities Regulatory Commission announced it will lift the freeze on initial public offerings on local stock exchanges that it imposed in Oct. 2012. The shift is one of many reforms that have trickled out of the Communist Party’s so-called third plenum last month, which pundits at first denounced as a do-nothing congress but have since reevaluated
. Now it's “the biggest expansion of economic freedoms since at least the 1990s.”
Wherever the truth lies, the regulator's decision is a big deal for global capital markets. China’s IPO pipeline was the richest in the world in 2010, with $71 billion in issuance, according to Bloomberg. The CSRC now says that 50 new companies will be ready to hit the market by January, while 700 more have put in applications to list.
That makes it a terrific time to send your resume in to Goldman Sachs’
(NYSE:GS) Beijing office. The benefits of a new IPO flood to investors and China itself are more dubious. The government shuttered the business for a reason: Chinese companies were becoming a byword for fraud, deceit, and hot air -- timber cutters without trees, milk producers who poisoned babies, and so on. Fully a third of the Chinese firms that went public in 2012 saw a decline in profits post-issue, according to MarketWatch
That and the sheer quantity of new equity available helped crater Chinese stock markets. The Shanghai Stock Exchange Composite Index (SHCOMP) has been falling consistently since Nov. 2010, losing one quarter of its value over the three-year period. The regulator promises a better IPO vetting process this time around, based on well-defined disclosure requirements rather than a murky subjective judgment that a company was market-ready. Buyers are still advised to tread carefully.
Back home, M&A booms have also tended to be better for Wall Street than investors or the broader economy. Just look at the two biggest deals of all time, both devised during the telecoms/dot-com fever of 2000-01. UK cellular operator Vodafone’s
(NASDAQ:VOD) $203 billion acquisition of German competitor Mannesmann was followed five years later by a GBP 28 billion ($46 billion) goodwill charge – i.e. acknowledgement of overpayment. And who could forget AOL’s
(NYSE:AOL) $182 billion purchase of Time Warner
(NYSE:TWX)? Twelve years later the combined market cap of the two companies, mercifully reseparated in 2009, is about $63 billion.
It is wonderful that the world’s corporate bosses feel upbeat about the future and have capital to deploy for growth that may bring down the developed world’s still frightening unemployment levels. But when that cash begins to slosh over into headline M&A deals, it likely signals a new round of trouble ahead.
No positions in stocks mentioned.
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