Is increased M&A and IPO activity a sign that economic confidence is returning?
01:00, 20 juni 2014
· Av CMC Markets
The return of large scale M&A activity has been cited as the latest example of renewed confidence as some parts of the global economy return to health after the tribulations of the past five years.
While not wanting to pour cold water on this belief it is anything but. CEO’s around the world have slim lined their businesses over the past few years to the point that any future revenue growth is now likely to be driven by investment in organic growth, which takes time to see results, or large scale M&A as companies look to put their cash piles to work.
It can’t be a coincidence that the rejuvenation of the IPO market has also occurred at around the same time as investors look to put their cash to work with markets around the world trading at record or multi-year highs, and interest rates continuing to remain low.
We’ve also seen share buybacks rise as well as companies return surplus cash to shareholders with Rolls Royce this week the latest in a long line of companies to do so, announcing a $1bn buyback earlier this week.
The recent failure of Pfizer in its attempt to acquire AstraZeneca for around $100bn was the most high profile attempt by a large corporate to put its cash pile to work at a time when earnings growth is starting to stall, or becoming more difficult to sustain.
In what became a rather bitter spat the aims of the deal, quite rightly became the focus of debate, rather than any synergies the deal might have brought.
Given that a great number of US corporates have significant cash piles overseas CEO’s are increasingly under pressure to put this cash to work, or return the cash to shareholders with the end result that the amount of tax these companies pay in their respective domiciles is now becoming an issue.
With corporate tax rates in the UK lower than in the US, and likely to get lower, and high penalties for US companies repatriating cash, management in these companies have been looking at relocating their tax domiciles as means to save money, as well as become more profitable.
These tax inversion deals while highly controversial have invoked a debate about the value of these deals in the context of creating new products as opposed to merely acquiring growth.
That bid raised not unreasonable concerns about the prospects of job cuts in the UK, given the recent decision by Pfizer to shed 2,000 jobs in 2011 at its research site in Sandwich, where Viagra was invented.
Pfizer management went to great lengths to assuage concerns that they wouldn’t be similarly aggressive if they succeed in their bid; however US CEO's do have form in this area, and Pfizer's track record in cutting costs in the wake of previous takeovers doesn't encourage in this area.
When Cadbury was taken over a few years ago Kraft CEO Irene Rosenfeld went to great lengths to promise to keep open a UK factory only to develop selective amnesia and subsequently close it once the deal has gone through.
Furthermore it is not immediately clear what the benefits to AstraZeneca would be in the event the Pfizer bid succeeds.
It seems the main driver behind the deal is the desire of Pfizer to shelter $70bn of its overseas cash pile from US taxation rules, and that doesn't seem a sufficiently good reason to do a deal if you are AstraZeneca
Moving on to GE it had $57bn worth of cash held outside the US at the end of last year, and the bid for French manufacturer Alstom is more than likely part of this effort to put this cash to work.
The bid prompted frantic efforts by the French government to head off the acquisition by encouraging German giant Siemens to mount a counterbid in an attempt to avert large scale job cuts to a company that has underperformed consistently since it was bailed out by the French government over a decade ago.
We now have the comical spectacle of an auction to see who can promise the most in terms of retaining jobs, while at the same time trying to turn around a company that is barely profitable, but generates nearly €20bn of revenues every year.
The fact that companies have to jump through political hoops to get a deal done seems rather uncompelling, particularly given the so called guarantees on jobs that have to be tendered.
How will these be enforced exactly particularly if significant restructuring needs to take place to make the company more profitable?
The latest candidate on the M&A treadmill is UK Company but Dublin based Shire Pharmaceuticals which was earlier this week linked with US based Allergan, with US based AbbVie putting in a lofty bid of $46bn in a similar attempt to cut its tax bill in the US, which has been rejected.
This recent activity in the M&A space has provoked heated debate as to the value and reasons behind these deals.
While AstraZeneca was able to successfully argue that Pfizer was only interested in the deal for tax purposes and not for in the long term commercial success of future R&D, these deals have raised the stakes for shareholders in the context of what their commercial priorities should be, when assessing any deal.
Should shareholders be interested in growing a business for the long term, or look to cash in at the earliest available opportunity and not care about the long term consequences?
The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.