M&A and Investment
James Mee reviews the volume of Mergers and Acquisitions (M&A) in 2015 and what this could mean
Despite 2015’s headline-grabbing macro-concerns, global M&A values reached record levels in 2015; the total value of announced transactions reached $4.6tn, ahead of the $4.3tn high-water-mark set in 2007. Generally, high levels of M&A speak to a strong economy and positive outlook, but are normally indicative of late-cycle markets. However, on this occasion we think there are good reasons to suggest that high M&A volumes are not yet signalling the end of the cycle.
First, with an uncertain growth outlook, companies have preferred to acquire proven businesses rather than take investment risks themselves and develop their own businesses organically. This has been particularly prevalent in the global Pharma space. Second is the “tax inversion” trade, where the acquirer buys the target in order to re-locate its headquarters in the target’s home country in order to benefit from a lower corporation tax rate.
While mergers and acquisitions can add value, there is some evidence to suggest that the benefits are short-lived. In our view, companies need to invest in themselves in order to grow over the long term. As the US and UK economies move towards full employment and labour becomes less available and more expensive, 2016 could mark an inflection point where investment begins to outpace payouts (dividends and share buybacks). Though a reversal of the recent underinvestment trend may be some way off, there is certainly room for an increase in operating expenditure, particularly in efficiency-enhancing technology. Such investment ought to play a significant part in productivity growth going forward, which in turn will benefit the growth outlook for the global economy.
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