If appetite for mega-deals is indicative of top of the market froth, then we are undoubtedly riding for a fall. Shell’s bid for BG Group, last week’s mooted tie up between AB Inbev and SABMiller, a combination already dubbed “Megabrew”, Altice’s $17.7bn purchase of Cablevision – rarely before have rainmakers been kept so busy. Both the number and value of $10bn plus deals this year have already surpassed previous records, set in 1999 and 2006. No prizes for pointing out what came immediately after these last two peaks.
Yet the latest mergers and acquisitions boom may be a little bit different. It’s not just about animal spirits, the cycle and the abundant availability of free money. Rather, what we may be seeing is a backlog of deals and restructurings, held up by the crisis, finally coming to fruition.
In the absence of top line growth, companies are looking for further cost cuts to drive the bottom line. Need to respond to the tech revolution is another key motivator.Different dynamics are driving different sectors. With oil and gas, it is paradoxically a bottom of the cycle phenomenon. Oil companies tend to be at their most acquisitive when the price is down in the dumps, allowing the more solvent ones to buy up assets at fire sale prices.
The reason why we haven’t seen more oil and gas deals post Shell’s takeover bid for BG Group, which at the time everyone thought fired the starting gun on an industry wide orgy of consolidation, is that nobody’s too sure that the oil price has yet bottomed out. Shell may have moved too soon. The stock market wobble over the summer has given many a deal maker and IPO hopeful pause for thought.
In other sectors, such as telecoms, the outbreak of deals may have had something to do with pouncing while regulators were still in a state of recession induced sleep. Unfortunately for the corporate financiers, Margrethe Vestager, EU competition commissioner, seems of late finally to have woken up to the threat to competition posed by consolidation and announced a clampdown. At least two of the telecoms mega-mergers may fall foul of the Dane’s new found teeth.
In still other sectors, it’s about restructuring delayed by banking reluctance to recognise non performing loans. Now that banking capital has been rebuilt, such restructuring can proceed apace. Zurich’s £5.6bn bid for RSA presumably presages more action in the insurance sector, though banking mega-mergers may still founder on “too big to fail” concerns. Even so, there’s plenty of scope for deals in asset and wealth management. Indeed, there is barely a sector unaffected by the boom.
Not all mergers work. Many of them destroy more value than they add; one and one ends up equalling more like one and a half rather than three. Other takeovers seem to be more the product of executive boredom than strategic rationale; the vaulting ambition of a takeover beats the humdrum business of running the company any day of the week. Enjoy the boom while it lasts.