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Two M&A swallows came into view last week, with Friday’s statement by BP that it could sell its share of Russian joint venture TNK-BP, and Thursday’s news of an agreed £1.7bn cash offer by CGI for tech group Logica.
Yet we are still well short of a summer. May’s announced acquisitions included the third largest deal of the year so far – in Eaton’s $12.6bn agreement to buy Cooper Industries – but neither share prices nor the economic outlook suggest a surge in deal-making is just round the corner.
The causes are either a mystery or blindingly obvious, depending on where you look.
In many respects, the corporate environment favours M&A: reasonably-priced targets, strong corporate balance sheets, cash piles and low costs of funding. Low expectation of growth over the next few years should also act as a driver, as companies seek in-market consolidation to remove costs and improve earnings.
However, a glance at the eurozone and the wider uncertainties thrown up by the debt crisis there, and it is clear why chief executives and their boards are deciding that perhaps they will leave boldness in M&A to others.
Signs of wariness are apparent even in those approaches that get as far as announcement. The unusually high proportion of cash involved is one indicator. The number of deals agreed bilaterally off-market rather than through an auction is another.
Most telling is that the M&A coming through is mostly made up of long-expected and strategically obvious activity. Glencore/Xstrata, for example is a deal that has been waiting to happen. Indeed, the most surprising aspect of the proposed $90bn tie-up between the commodities trading house and mining group is the amount of almost £30m to be paid to Mick Davis over three years to stay in his job if the deal goes ahead and he becomes chief executive of the combined group.
Once observers have finished enjoying the discomfiture of deal-makers in these risk-averse times, more serious questions remain: does the relatively low level of M&A matter for anyone other than investment bankers and other advisers? And what might produce an uptick in activity?
This would normally be the time to recite statistics about the proportion of deals that destroy value rather than enhance it. It could also be the moment to name-check famous disasters such as the $164bn tie-up between AOL and Time Warner that was the subject of an apology from Time Warner’s Jerry Levin a decade after the event.
That route is too easy. Just as a giant wave of M&A can be harmful, as deals that should never have left advisers’ wildest imagings get executed (very possibly with some overpayment), an unusually low level of deal-making can be damaging to corporate health as well.
Participants sometimes argue that a dearth of M&A is bad news because it is a sign that business confidence is low. Somehow that feels the wrong way round. It is the rise in business confidence that is the central desirable outcome here.
But there are more powerful reasons why a persistent drying up of M&A deal-flow matters.
M&A tends to support economic activity. It can provide an exit for a struggling company and a quick route to expansion for a business that is growing. The ability to buy and sell companies is part of the tool kit of running and building an enterprise, and if deals are hard to complete there is a risk that companies miss out on opportunities they should have taken, to their long-term detriment.
That is particularly a danger when the world is changing so fast. The pace of globalisation makes the business rationale for doing deals is at least a strong as it has been in recent years.
A possible loss of competitiveness even if no deal actually materialises is also why M&A matters. If a management knows that there is next to no chance that poor or indifferent corporate results carry a threat of takeover, then one incentive to ensure strong performance is missing.
As to what might produce an increase in deal-making, there seems little point in looking to the economic backdrop any time soon. The eurozone crisis does not appear susceptible to a swift and satisfactory resolution, while consumer demand remains low.
One possibility is that a concentration of strategic deals in a particular sector tilts the balance so that it becomes foolishly brave for a company to sit on the sidelines rather than take part in industry consolidation. Sectors to look at here include industrials, healthcare, tech and anything to do with commodities.
Another is that an unexpected deal announcement acts as a signal that more normal conditions apply. If Coty’s unsolicited $10.7bn approach to Avon had succeeded, this might have been such a trigger. As it was, both companies looked bad at the limp ending to the six-week stand-off, and the exercise offered instead a reminder why caution still reigns.