Mergers And Acquisitions Spending Reaches All Time High

Adrian Ash - Wed 09 May, 2007

"Global mergers and acquisitions (or M&A for short) volumes leapt over the $2,000bn mark yesterday," reports James Politi for the Financial Times in New York. According to Dealogic, the global consultancy, M&A activity since the start of this year has outpaced the same period in 2006 by nearly two-thirds. March this year was the busiest month in history for corporate deals, right up until April. The previous top for M&A spending the DotCom Bubble of 1999-2000 now feels more like false memory syndrome than a warning from history...

Adrian Ash, mugged up as Les Dawson in
Hammersmith:

- Fancy a quick round of Blankety Blank, the classic '80s gameshow? Just write down the word that best completes these well-worn news headlines.

- And remember, as always, that the clue is in the question!

- "European stocks set new 6-year high on BLANK," says Reuters. "FTSE ticks down on oils; BLANK supports."

- "Huge deals fuel record-breaking BLANK," the FT agrees.
"BLANK activity thrusts New York to fresh peaks."

- "Canada's dollar climbs to 11-month high amid BLANK optimism," chips in Bloomberg. It's published 15 stories on the subject of "BLANK" pushing asset prices higher worldwide in the last week alone.

- What is this mystery blank? What could provide such rocket fuel...pure liquid hydrogen...to support, thrust, fuel and send stocks, indices, funds and even currencies soaring to fresh highs almost every day?

- Just as in the classic BBC gameshow, losers in today's Blankety Blank financial markets never go away empty handed, of course. The twist in 2007, however, is that the free Blankety Blank Chequebook and Pen now underwrite the whole gameshow as well.

- Yes, mergers & acquisitions – or M&A for short - are the missing blank in any reading of today's financial markets. Scribbling a cheque to buy up a listed company...any listed company...is the only game left after six years of easy money.

- "Global mergers and acquisitions volumes leapt over the $2,000bn mark yesterday," reports James Politi for the Financial Times in New York, "as the pace of corporate deal-making in 2007 continued to exceed even the rosiest predictions on Wall Street and in the City of London."

- According to Dealogic, the global consultancy, M&A activity since the start of this year has outpaced the same period in 2006 by nearly two-thirds. March this year was the busiest month in history for corporate deals, right up until April. The previous top for M&A spending – the DotCom Bubble of 1999-2000 – now feels more like false memory syndrome than a warning from history.

- "Resources have been misallocated because of the cheapness of credit in both stock and credit markets,"
noted Al Friedberg for Welling@Weeden in March, 2001.
"You're not going to solve the problem by making money cheaper again."

- Oh yeah? In Canada alone, nearly 600 listed companies have now been snapped up by foreign buyers since the start of last year. "The [global] boom in transactions is being driven by a combination of cheap debt to finance acquisitions, a benign antitrust environment, particularly in the US, and globalisation, which is forcing companies to reassess their competitiveness and their mix of businesses," says the FT.

- Hence Alcoa bidding for Alcan to create the world's largest aluminium firm. Merrill Lynch says private equity might be set to buy BHP Billiton, the world's largest mining group. BHP itself could now be preparing a bid for Rio Tinto, according to the latest rumours. Rumour also claims that Barrick Mining, the world's largest gold miner, wants to buy Newmont, the world number two.
Thomson, the newswire service, is bidding £8.8 billion for Reuters – a 42% premium to Reuters share price of only four days ago. And ABN Amro, the under-performing investment bank, has now got so many suitors, it's using the courts to scuttle fresh bids unless they add a couple of billion to the offer!

- "At the end of a long bull market with an excess of liquidity, such as we have enjoyed or in some cases suffered for the last 12 years, two factors prevent takeovers from fulfilling their creative function and maximise the likelihood of their causing destruction,"
writes Martin Hutchinson for PrudentBear.com.

- "First, fashionable shares have been bid up to astronomical prices. Thus even when, as in the case of Google and Microsoft, they have major operating weaknesses, they are priced not on the basis of their weaknesses but on the memory of their previous strengths – or in Google’s case, their previous hype – thus making any health-giving asset-stripping or break-up exercise impossibly expensive."

- "Conversely, twelve years of liquidity leads to an accumulation of money in the wrong places, whether in dozy conglomerates in the late 1960s, in semi-fraudulent investment trusts in the 1920s or in hedge funds and private equity funds today. This 'silly money' has to find something to do; its shareholders won’t stand for inaction. Since badly run tech companies are off the table because of their overvaluation, and all the badly run non-tech companies have been snapped up long ago, the only remaining victims are well run non-tech companies."

- Hence the sale of Boots Plc to private-equity outfit KKR, says Hutchinson – "with neither side alleging any ineptitude" in the way Boots has been managed recently.
If only "the European Union could make itself useful for once," he goes on, "and pass a twelve month cooling-off directive mandatory on its members. A great deal of job loss, value destruction and human misery would thereby be avoided."

- How could the losses and misery of tomorrow ever compete with the M&A profits of today? Expect this bubble to roll on for just as long as the money keeps flowing.

- Don't expect a quarter-point hike from the Bank of England this week to stop the City from hawking itself back to itself at record high prices.

Regards

Adrian Ash
For The Daily Reckoning

Adrian Ash is head of research at BullionVault.com the world's fastest-growing and best-value gold ownership service.

http://www.bullionvault.com/from/dailyreckon