Merger activity is approaching a record high.
And as my colleague Matt Turner noted on Wednesday, Bank of America Merrill Lynch strategist Hans Milkkelsen wrote in a note to clients that after companies levered up their balance sheets following a post-crisis re-trenching, investor appetite for further borrowing has started to dry up.
As Mikkelsen wrote:
Our view is that a lot of [corporate borrowing] activity was front loaded — which was especially the case this year where companies pushed forward to beat the Fed’s rate hiking cycle. Because equity investors — that tend to get what they ask for — increasingly are saying enough is enough, and a lot of releveraging activity was front loaded, and with an expected more benign rate hiking cycle there is less urgency to pull the trigger on deals, we continue to think that corporate balance sheets (ex-energy, ex-materials) will improve in 4Q and into 2016.
So what Mikkelsen is saying investors want is more responsible behaviour from corporate leaders: less debt, less financial engineering, more spending on productive investments or paying down accumulated debts.
And in the wake of this week’s mega-merger announcements from SABMiller-AB InBev and EMC-Dell — which total about $US170 billion between them — anybody who wants to be nervous about a merger boom signalling trouble for the market and economic cycle is probably warranted.
In a note to clients on Wednesday, Deutsche Bank’s economics team summed up how we got to this point in the merger cycle.
As the following charts lay it out, growth has been hard to come by, investors wanted companies to do something with cash built up after the crisis, it’s been cheap to borrow money, and stocks are highly valued, making them a useful currency for funding acquisitions. Put it all together and 2007’s merger record looks set to be topped.