Considering how much of a struggle it has been for most companies to achieve meaningful top-line growth in the recent macro-economic climate, it might be perplexing to the layman to see such historically low levels of merger and acquisition activity. This is all the more surprising when one considers that corporations are sitting on cash levels that represent multi-decade highs. After all, you would have thought that the easiest way to grow your turnover at a stroke is to bolt on someone else’s particularly if you have cash burning a hole in your pocket and earning a measly rate of interest.
The answer to this conundrum is, of course, that magic and seemingly omnipotent word, confidence. Although the banking crisis appears to have eased, the global economy is still ridden with unresolved threats like the possibility of deflation in the Eurozone and the budgetary impasse in the US. Growth still appears to be happening but at a subdued rate and the suspicion remains that recovery is unduly dependent on the continuation of Quantitative Easing and that, as soon as this tapers off, it could fizzle out entirely.
In this uncertain environment, most companies that are in a position to buy are still holding back from pulling the M&A trigger because they either think that their targets could become cheaper and/ or fear they could develop into liabilities rather than assets. If, for example, the Eurozone starts to drag everyone down into a deflationary spiral, the capital value of cash will increase even if interest rates remain minimal. An acquisition target on the Continent which looks good value today would almost certainly be cheaper tomorrow if falling economic activity leads to falling sales revenues and profits. If deflation actually sets in as it threatens to do early in 2014, people will defer buying goods and services in the hope that they will become cheaper.
With such an appalling prospect still a real possibility, it is easy to see why the European Central Bank has recently chopped its interest rate to next to nothing.
Of course, the vast majority of finance directors have never experienced the nightmare of deflation which is very easy for countries to slip into but extremely difficult to get out of. The only major recent occurrence has been in Japan where the government has had to resort to monetary and fiscal Blitzkrieg as well as a Yen devaluation to reverse the trend. These are dangerous and uncharted waters as far as most corporate managements are concerned.
There are, however, signs of light starting to appear between the clouds. In addition to the usual flow of opportunistic deals that are simply too good to miss, Eurozone companies are, not surprisingly, keen to buy in more economically robust countries while businesses in the US and BRIC markets appear confident enough to stepping up their deal rate both at home and abroad.
Here in the UK we can only hope that the nascent recovery in Mergers & Acquisition activity that is tentatively beginning to emerge is not derailed by a downward spiral in the Eurozone and that the European Central Bank will steer everyone away from the rocks in coming months.