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May 29, 2017

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M&A and dividend frenzy being fueled by easy money

PARIS -- Massive dividend payments and mega mergers: with markets flush with central bank easy money companies have begun to raid their war chests, gobbling up competitors or rewarding investors.

In the first quarter of this year dividend payments jumped by nearly a third and several titanic tie-ups were announced, with the United States in the forefront.

Global growth remains sluggish, but its return is sufficient "as all over the markets there is liquidity waiting to be used as everything has been done to stimulate them, especially by the U.S. Federal Reserve and Bank of Japan," said Renaud Murail, a portfolio manager at Barclays Bourse in Paris.

The U.S., Japanese and British central banks have conducted massive purchases of assets in recent years in order to inject liquidity in the markets and jump-start stalled economies.

On top of this central bank liquidity there are the funds "accumulated by European companies as a precaution after the liquidity crunches they experienced in 2008 and 2011," said Romain Boscher, global head of equities at asset manager Amundi.

With the global economic crisis receding and eurozone tensions dissipating, companies are no longer hoarding cash and the amount they have been paying out to investors has soared.

Globally, it jumped by 31.4 percent in the first quarter of this year compared with the same three month period in 2013, according to a study by Henderson Global Investors.

It hit US$228 billion (167 billion euros), the best quarter since the end of 2012.

"The lack of visibility led companies to make big restructuring efforts, especially in the United States. American companies have accumulated huge war chests ... Now there has been a break in the clouds, this cash is coming out of the vaults to finance share buybacks, dividend payments, our mergers and acquisitions," said Murail.

But Boscher noted there is one big difference between European and U.S. companies.

"European companies are very far from returning to their levels of profitability before 2007 and have not yet launched massive share buybacks," he said.

Buying Easier than Investing

U.S. companies have also been the most generous to their shareholders. With payouts to investor up by 30 percent in the first quarter, they far outpaced their European and Japanese counterparts, according to data from Henderson.

There has also been a return to the mega mergers of before the global financial crisis: General Electric has its eyes on French energy and transport company Alstom, Pfizer sought to swallow rival AstraZeneca, Omnicom and Publicis tried to create the world's biggest advertising company, while AT&T is buying DirecTV and Comcast is taking over Time Warner Cable in a big shake up the U.S. market to provide Internet and TV content to U.S. homes.

The mergers are far from being financed from the companies' own funds.

"Companies are benefiting from their ability to borrow at ultra low rates from banks or raise large sums on the markets on very attractive terms," said Murail.

And not only solidest companies are benefiting: with super low interest rates prevailing, Murail said investors looking for higher returns are sacrificing a bit on the quality of their investments.

"The wave of mergers and acquisitions is just beginning," said Boscher.

"In a period of weak growth, it more reassuring to buy a competitor than to open a new factory."

A return to more productive investments such as research and development, or expanding or modernizing manufacturing capacity, will need to wait for the global recovery to pick up pace, said the investment managers.

Industrial sectors are still weighed down by overcapacity as markets still haven't recovered to pre-crisis levels, while services are fighting price wars that are eroding their margins.

"Solving the financial crisis via liquidity was a pre-requisite to overcoming the economic crisis, but it wasn't a guarantee," said Boscher.

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