Analysis: Cheap money, growth plans ignite global M&A

HONG KONG/NEW YORK (Reuters) - Cheap loans and sluggish growth prospects in Western economies are fueling a wave of international mergers and acquisitions, a buying spree helped by the continued strength stemming from emerging markets.

Even after the most active August in a decade for M&A, the action has not stopped, with more than $50 billion of deals surfacing this week from Shanghai to South Africa to Brazil, according to Thomson Reuters figures.

Spurring the takeovers are large cash piles building up on corporate balance sheets, low borrowing costs and the temptation to buy and sell now, before the economic climate weakens.

Much of the attention is focused in emerging markets, where growth is strongest.

“Every major multinational you talk to -- all they want to talk about is the BRICs,” said Joseph Gallagher, the Asia Pacific head of M&A at Credit Suisse, referring to Brazil, Russia, India and China. “Post-crisis, developed market companies are really faced with the fact that growth is slowing at home.”

Quarterly deal volume, which at times surpassed $1 trillion during the 2006/07 M&A boom, has been creeping higher over the past 18 months and for the third quarter of 2010 was $677 billion, according to Thomson Reuters data.

Citigroup points out that Asian corporates are “awash in cash” and makes a stronger case for paying dividends than chasing takeovers.

“M&A has a poor track record of adding value whereas cash flow and dividends have a good record,” Citi says.

Still, with cash in hand, companies globally are finding it hard to resist the temptation to pursue growth through acquisitions.


The trend is the same in Europe, where Morgan Stanley analysts say companies are generating plenty of cash, enjoying access to credit at record low rates, and have robust balance sheets, with average net debt to equity at a 13-year low -- all pointing to a pickup in both M&A and share buybacks.

Low valuations and recovering earnings are powerful incentives to put cash to work.

According to Starmine SmartEstimates, earnings for the 1,625 companies in the Thomson Reuters U.S. equity index are forecast to increase about 20 percent over the coming year. SmartEstimates gives greater weight to recent estimates from top rated analysts.

Since earnings bottomed out in the last quarter of 2008, earnings have increased each quarter until the second quarter of 2010, according to Thomson Reuters data. The third quarter is currently expected to be slightly below the second, although that may change after the earnings season is finished.

Among the companies looking to take advantage, Wal-Mart Stores Inc WMT.N this week offered $4 billion to buy South Africa's Massmart MSMJ.J, Unilever ULVR.L followed with a $3.7 billion bid for U.S. hair and skin care company Alberto Culver ACV.N and Chinese refiner Sinopec 0386.HK is to buy a stake in Spanish oil major Repsol REP.MC for $7.1 billion.

News of those deals surfaced at the same time sources and media reports said that China’s Bright Food was in talks to pursue the purchase of United Biscuits.


The getting is good not just for corporate buyers, but financial ones as well. The private equity mega-deals that soared in 2006 and evaporated a year later look more attainable.

"The debt markets have rebounded robustly; they certainly are at a level today that facilitates more opportunities," said Michael Michelson, co-head of Kohlberg Kravis Roberts & Co's KKR.N North American Private Equity business, at a recent Dow Jones conference in New York. "I think that if the debt markets stay as robust as they have been, we will see an increase in transactions."

Acquisition loan volume in Asia is up 61 percent from last year, according to Reuters Basis Point, as top regional corporate buyers such as Hutchison Whampoa 0013.HK and Bharti Airtel BRTI.BO tap cheap funds from banks eager to earn fees on lending, as well as from lucrative follow-on business.

This year Bharti paid just 193 basis points above benchmark interbank loan rates to the top-level banks joining its $7.5 billion jumbo loan to buy Zain Group's ZAIN.KW African assets.

Last year, the cost of borrowing U.S. dollars in India was so high that there were no dollar-denominated M&A loans.

Benchmark Treasury yields tightened considerably over the first nine months of 2010, according to Thomson Reuters data.


Lingering market uncertainty is not dissuading buyers, said Stephen Gore, Asia Pacific head of M&A at UBS in Hong Kong.

“Now that things have stabilized, even though they may not look optimistic, people have some ability to forecast where earnings are going to be. That stability gives acquirers the comfort the price they are paying for assets,” Gore said.

While waiting for a market slide would make purchase prices more attractive, such a retreat could also be accompanied by a sovereign default or a major market event that would hurt confidence and ability to finance deals.

Some advisers are warning buyers to beware. Especially as emerging markets strengthen, prices rise -- causing some bankers to advise clients to look beyond the top countries.

“People are absolutely right to go strongly into these (emerging) markets -- but do it with the right risk assessment,” said Mark Malloch-Brown, chairman of global affairs at business advisory firm FTI Consulting, speaking on the sidelines of the Dow Jones conference. He cited Laos, Cambodia, the Philippines and Indonesia as other investment targets.


Investors have, in some cases, raised the argument that they would like to see the cash used to buy back shares rather than M&A.

Some BHP Billiton Ltd BHP.AXBLT.L shareholders want the miner to buy back shares rather than pursue the $40 billion hostile takeover of Potash Corp POT.TO.

For now, however, the companies seem bent on using the cash to scoop up targets while they can.

Though a buyback is one way to keep shareholders happy in the short term, it does not offer growth, and does not add revenues, hence the preference for other uses of cash piles.

“What will happen is strategic M&A, and there will be an increase in hostile deals as companies looking at growth here and overseas see opportunities to buy something,” said Kevin Conway, managing partner at CD&R, speaking at the Dow Jones conference.

Additional reporting by Quentin Webb in London, Stephen Aldred and Vikram Subhedar in Hong Kong; Editing by Michael Flaherty, Lincoln Feast and Matthew Lewis