Friday, March 17, 2006

Mergers and global liquidity

Is cheap money the driving force behind recent merger activity? I've noticed a steady increase in consolidations across a variety of sectors in any number of localities. It seems like some of the more successful companies have been collecting cash and are undecided over what to do with it. The more favorable dividend tax rates in the US have led some companies to increase or reinstate dividend payouts over the past few years, while others have decided to enact share buybacks or acquire companies.

In the resource, energy, and utilities sectors, a lot of deals seem to be driven by fear or a rush to replace reserves (in the case of the oil and gold companies). Some mergers have taken on a political dimension, with the recent utilities mergers in Europe and the failed ports deal in the US shining a light on increased feelings of protectionism and nationalism. But what of the recent exchange mergers? Are they driven by a real desire to improve efficiency and offerings, or is it a bit of ambitious industry globalization? Is their publicly traded stock a strategic currency for buying out competitors or exchanges abroad, or will they buy their targets with cash?

The hedge funds were making the flashy money at the start of the decade, but the last few years have been about private equity deals. The private equity firms have been doing a great share of the buyout deals in recent years, largely by using debt and bank financing in their company takeovers and reorganizations. Private equity and M&A activity are certainly playing a part in driving the UK market, according to one Reuters report:

"Private equity will also keep the market well supported but the earnings momentum has peaked ... so the market will really run on M&A activity and the dividend cash flow payouts"

More on this to come.