From time to time, we like to remind visitors to The Value Perspective to judge companies and their managers on their actions rather than their words. The outlook statements that accompany company reports are rarely anything other than cautiously optimistic (if prudently conservative) so we have been interested to note what appears to be a meaningful uptick in merger and acquisition (M&A) activity.
Recent sizable deals – proposed or completed – include the $35bn (£23bn) merger of omnicom and publicis to create the world’s biggest advertising company; the ongoing buyout of computer manufacturer Dell for $24bn; and the $10bn takeover of Kabel Deutschland by Vodafone.
There is also Perrigo buying fellow drug-maker elan for more then $8bn; the planned acquisition of KPN Telecom’s mobile arm E-plus by Telefonica Deutschland for more than $6bn; the $5bn acquisition of engineering firm invensys by France’s Schneider Electric; and Rio Tinto selling its share in an Australian copper and gold mine for $820m.
With that list taking in media, technology, telecoms, pharmaceuticals, industrials and mining, it is clear the current activity is not focused on a single sector or indeed a particular region. A number of factors are behind it all – low debt rates mean funding is ample; market liquidity is sufficiently helpful to get the deals done; and of course businesses are feeling reasonably optimistic about the economic outlook.
All of which has to be good news for equity investors, right? Well, if you believe that, you may not have been visiting the value perspective for very long. We are probably still at a relatively early stage in the current M&A cycle – and of course one can never know for certain what the future will bring – but the fact remains that such activity does have a strong correlation with market levels.
In other words, as we have often discussed, when the stockmarket is high, you tend to see a lot of M&A and, when it is low, you tend to see very little. Few companies do deals at the optimal time – buying low and selling high, which is the entire ethos of our own approach. That is why so much M&A ends up destroying value and why we are inclined to view large increases in these deals with caution.