A number of big name companies are embroiled in potential takeovers at present, most notably Pfizer’s attempt to acquire AstraZeneca and GE’s move to buy a large piece of France’s Alstom.
Standard Life Investments said in a recent research note it believes there will be further expansion of M&A activity to follow the recent deals, stretching into 2015. This will be driven by good availability of funding, a reduction in economic uncertainty and continued pressure on businesses to cut costs in a slow growth environment.
“In recent months, there has been considerable debate about whether or not companies will begin to invest, putting cash to work,” said Andrew Milligan, SLI head of global strategy. “We believe that as cyclical forces start to take hold across the global economy, as business confidence improves and as financing becomes easier, so the pickup in M&A will continue,” he added.
Milligan said he expects a broadening of sectors which see significant deal flow to include media, autos, internet companies, beverages, financials, real estate, software and telecoms. This will be positive for market valuations and investors’ portfolios, he said.
This bullishness is far from universal however. The emergence of a few big name takeovers appears to create an overly rosy perception of total activity. When the likes of AstraZeneca or Pfizer launch a transaction M&A is brought squarely onto the front page of the business news agenda and leads the financial and even mainstream news bulletins. This is particularly true when a deal has political implications, as is the case with AstraZeneca and Alstom.
The result arguably, is overplaying of the significance the deals in question have for the broader M&A market and deal levels over a sustained period. There are precedents for a bearish scenario. When mining company Glencore announced a deal to buy its peer Xstrata in early 2012 it put M&A at the top of the business news agenda and similar questions were asked whether it heralded a sustained string of big deals and a wider recovery in deal activity. However levels remained relatively low, historically.
Analysis by Ernst & Young lends support to this view. Deal volumes, still low by historical standards, are only expected to rise marginally, the professional services firm said. It said that there could well be further big ticket, headline grabbing deals but there is little indication this will translate into a broad upswing in takeovers across different sizes of companies or across sectors.
In a survey of executives by EY only three in 10 respondents said they expect deal pipelines to increase, with the rest saying there see no change in outlook or a fall.
EY did note the survey has found high levels of confidence in the global economic outlook among executives, a key foundation for M&A. Over 60% said they believe the global economy is improving and 31% said it would remain stable, with just 9% expecting deterioration. However this can change very quickly due to the volatility of certain situations around the world.
The macroeconomic picture has a number of significant uncertainties at moment, principally the risk of the crisis in Ukraine escalating further but also continued turmoil in Syria and tension between China and Japan. A significant deterioration in any of these situations or an unforeseen geopolitical shock could quickly dent this widespread confidence and result in an M&A plans being shelved.
Government intervention to block or seriously hinder the Astrazeneca or Alstom deals could also make other CEOs and boards think again about their own big deal plans.
