The global equity strategist responsible for LGIM’s overall equity strategy said that from a top-down perspective many of the traditional M&A drivers, particularly companies’ ability to buy, have been in place for some time.
But until now the most important ingredient to fuel deals has been missing: business confidence.
Corporate balance sheets have been in rude health for some time, with Federal Reserve data showing that for US non-financial corporations cash and short-term liquid securities account for around 15% of total assets, the highest in about three decades.
On top of this it is easier and cheaper to borrow since investors’ search for yield has seen them pour into corporate debt, and for companies on the buying side of deals equities are relatively cheap by historic standards.
Kreckel added that investors have become increasingly active in pushing for companies to either use their cash piles or to return money to shareholders.
Cash to burn
In support of this, a recent Bank of America Merrill Lynch fund manager survey revealing that approximately 80% of investors want companies to either use cash flow to increase capital expenditure or to return it to shareholders. Only 12% preferred companies to use it to continue to deleverage their balance sheets.
So now that most of last year’s macro concerns have faded and the global economy has started to show some signs of a cyclical recovery, investors and companies have started to break out of the "deflation psychology" they have been mired in since the financial crisis.
“Apart from the fundamental case for more M&A activity, the past weeks have brought increased evidence that deal flow is indeed beginning to show signs of life with high-profile acquisitions such as Virgin Media, Dell and Heinz being announced,” said Kreckel.
“An important side-effect of M&A, especially the leveraged buy-out type, is that is that it would support the nascent trend of asset class rotation. While a positive from an equity investor’s perspective, the re-leveraging that often accompanies acquisitions is an additional risk for credit investors, especially at currently low spreads and yields,” he added.
Kreckel concluded that while he could not be certain of the long-awaited M&A revival this year, and is aware of strategists’ track record in predicting it, the fundamental case is the strongest it has been in many years, with improved business confidence a crucial and supportive change over the past 12 months.
