IBJNews

Corporations still deal-shy even as stocks surge

Associated Press
November 20, 2013
Back to TopCommentsE-mailPrintBookmark and Share

A surging stock market usually comes with a boom in corporate deal-making.

But deals are lagging this year, even as the market notches a series of record highs and is headed for its best year in a decade.

Deal levels are sluggish for a number of reasons. The U.S. economic recovery has been slow and unsteady. Investors are concerned that growth could falter if the Federal Reserve withdraws its huge stimulus program too quickly. Stock valuations are getting pricier. There are also fears of more budget fights in Washington, D.C., and a possible default by the U.S. government.

"If you're an investor, a C-Suite executive trying to make a big bet, you're probably going to be more cautious," said Richard Jeanneret, who advises companies on mergers and divestitures as a member of the Americas executive board at EY, the global consultancy firm formerly known as Ernst & Young.

The value of U.S. deals announced through the first nine months of 2013 was 33 percent below the same period in 2007, when the stock market was also marching toward an all-time high and deals surged. Mergers and acquisition totaled $761 billion through September, compared with $1.1 trillion over the same stretch in 2007.

Executives are also holding back because they see stocks becoming more expensive relative to earnings. Companies in the Standard & Poor's 500 index have an average price-earnings ratio — a measure of how much investors are willing to pay for future earnings — of 15.1. That's up from 12.6 at the start of this year.

Mergers fell off dramatically after 2007 as companies retrenched and focused on survival in the wake of the financial crisis and Great Recession.

An economic recovery that began more than four years ago has been halting, but the broader stock market has surged. The Standard & Poor's 500 index has climbed 160 percent since its recession low in March 2009.

A pair of big-name deals in February led investors to think the M&A market was heating up. Warren Buffet's Berkshire Hathaway joined another investment firm to acquire Heinz for $23.3 billion and Michael Dell offered to take his computer company private for $24 billion. But instead of inspiring more corporate combinations, big deals fizzled out after those two were announced.

Other events have given deal-makers pause. In October, investors saw how dysfunctional Washington had become. An impasse over the federal budget led to a 16-day partial shutdown of the government. The U.S. also came close to defaulting on its debt.

The most recent peak in U.S. deal activity came in the second quarter of 2007, when U.S. companies announced $508 billion of acquisitions, according to EY data. Less than four months later, in October, the S&P 500 reached 1,565, a record at the time.

A surge in acquisitions also preceded a run-up in the stock market in the late 1990s. Companies announced $1.5 trillion worth of deals in 1999 before deals dropped off when the technology-bubble burst. The S&P 500 climbed to a record in March 2000.

Analysts have been expecting a pickup in deals for some time partly because companies are sitting on record piles of cash. Borrowing costs are also low, another factor that encourages deal-making.

Stock prices typically rise when there is a lot of merger activity because the acquiring companies typically pay more than the target companies' market price. A more ebullient M&A market can also lead to bidding wars between acquiring companies, pushing stock prices even higher.

Now, when an acquiring company sweetens its offer to buy a company, it's often paying less of a premium.

The average premium paid in deals this year is 20 percent, the lowest since 1995, according to data from Dealogic. The average premium paid by acquirers since then is 32 percent.

In the past, advances in the stock market coincided with a rising tide of deals.

An increase in deal-making would be a positive sign for the stock market because it indicates that companies are more confident about future growth, said Alec Young, a global equities strategist at S&P Capital IQ. However, if the pace of mergers were to pick up to a "frenzy," as in 2007, that may signal that the broader stock market has peaked, Young said.

Mergers are unlikely to pick up significantly before economic growth climbs above 3 percent, said Mark Haefele, chief investment officer at UBS Wealth Management. That's a level where executives start to feel more comfortable that their investment in another company will pay off.

By that measure, a pickup in deals may materialize soon.

U.S. economic growth accelerated to a 2.8 percent annual rate in the third quarter, the Commerce Department reported in its initial estimate of growth for the period. That was up from 2.5 percent in the previous quarter and nearly a full percentage point higher than economists had predicted.

If executives see competitors going on a buying spree, their attitudes toward M&A may change quickly and the pace of deal-making could pick up, says EY's Jeanneret.

"It's kind of 'You go first' mentality," Jeanneret says.

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
 
Subscribe to IBJ
  1. How can any company that has the cash and other assets be allowed to simply foreclose and not pay the debt? Simon, pay the debt and sell the property yourself. Don't just stiff the bank with the loan and require them to find a buyer.

  2. If you only knew....

  3. The proposal is structured in such a way that a private company (who has competitors in the marketplace) has struck a deal to get "financing" through utility ratepayers via IPL. Competitors to BlueIndy are at disadvantage now. The story isn't "how green can we be" but how creative "financing" through captive ratepayers benefits a company whose proposal should sink or float in the competitive marketplace without customer funding. If it was a great idea there would be financing available. IBJ needs to be doing a story on the utility ratemaking piece of this (which is pretty complicated) but instead it suggests that folks are whining about paying for being green.

  4. The facts contained in your post make your position so much more credible than those based on sheer emotion. Thanks for enlightening us.

  5. Please consider a couple of economic realities: First, retail is more consolidated now than it was when malls like this were built. There used to be many department stores. Now, in essence, there is one--Macy's. Right off, you've eliminated the need for multiple anchor stores in malls. And in-line retailers have consolidated or folded or have stopped building new stores because so much of their business is now online. The Limited, for example, Next, malls are closing all over the country, even some of the former gems are now derelict.Times change. And finally, as the income level of any particular area declines, so do the retail offerings. Sad, but true.

ADVERTISEMENT