Andrew Miller: M&A investment is looking increasingly attractive

Merger and acquisition (M&A) activity has picked up markedly in the past year: a six-month rolling average of deals reported by Bloomberg is at a post-crisis high

Andrew Miller
Andrew Miller

Like London buses, you wait ages for a blockbuster deal then several come along at once.

Merger and acquisition (M&A) activity has picked up markedly in the past year: a six-month rolling average of deals reported by Bloomberg is at a post-crisis high, and in April there have been two announced US$20bn-plus deals, with unconfirmed reports of another two pending.

The upturn is not unexpected, as M&A has a cyclical component.

If anything, the surprise is that it took so long coming.

The financial crisis clearly cast a long shadow, and chief executive officer confidence has taken a while to recover. But the objective drivers of M&A have long been in place, and it has been a recurrent investment theme for us these past few years.

Targets are attractive: corporate profitability and cash flow is respectable. Funds are available – balance sheets are cash rich, investor appetite for corporate bonds remains high, and banks are more able, and willing, to lend if asked.

Post-crisis restructuring, new technology and the ongoing search for consolidation provide plenty of bottom-up business cases. Price Earnings Ratios (share price compared to earnings per share) are no longer depressed, but low interest rates mean that when viewed through the lens of discounted cash flow, valuations can still look cheap to would-be acquirers. Confidence has been the missing ingredient, but surveys suggest that it is again gathering some momentum after the weather-affected first quarter.

What does more M&A mean for investors? It is not easy to second-guess the deals themselves – some sectors, such as pharmaceuticals, are more active than others, but in the aftermath of the crisis, opportunities will be plentiful and spread across most sectors and regions – including, unusually, Japan, if Prime Minister Shinzo Abe’s plan to stimulate the economy (Abenomics) works. Instead, we’d view a wave of M&A as another reason for tactically and strategically favouring developed equity markets ahead of most other assets.

This contrasts with the popular view that M&A destroys value, and that the shareholders of acquiring companies in particular lose out as ego-driven, reckless CEOs overpay for unfamiliar assets.

Whichever view you hold – for many big, old companies the acquiring of suppliers and smaller competitors, and the divesting of restructured or sidelined assets, is part and parcel of business life, often with its own departmental structure.

M&A can’t easily be disentangled from business as usual, and a convincing assessment of its worth may be elusive.

Andrew Miller, director, Barclays Wealth and Investment Management, Newcastle

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