Low rates and rising confidence sparking takeovers: analysts
By Jean Baptiste Oubrier, AFP
June 23, 2014, 12:04 am TWN
PARIS--Low interest rates are stoking the fires of takeovers, with about a quarter of big groups now on the lookout for targets in the next 12 months, a study found recently.
The signs are clear “that plans for transformational acquisitions are accelerating,” the survey by consultancy EY concluded.
The pharmaceutical sector has led the way so far this year with deals worth US$150 billion, according to consultancy Dealogic, and that does not include a failed bid worth US$117 billion by U.S. firm Pfizer for British-Swedish group AstraZeneca.
On last Friday, a bid worth US$46 billion or 33.7 billion euros by U.S. drugs laboratory AbbVie was rejected by Shire Pharmaceuticals which is listed in London and New York but based in Dublin.
On last Wednesday, U.S. group Valeant launched a hostile bid of US$53.5 billion for Allergan.
Much of this is driven by a need to grow and cut costs to counter the expiry of some patents on high-earning drugs, analysts say.
The survey assessment by EY backs up comments from analysts for some time that ultra-low interest rates by several leading central banks is one of the main factors re-lighting interest in takeovers.
Other forces are at work as well: during the financial crisis that began in 2008, and the subsequent eurozone debt crisis, many big companies restructured their businesses and hoarded cash.
They did not have sufficient confidence in the outlook to invest, even by borrowing cheap money being pushed at the banking system by some central banks.
But now many businesses are gaining confidence in the recovery and are looking to expand by buying other businesses: this can offer a faster route to growth than setting up new operations, and may be less risky.
EY interviewed 1,600 executives in companies in 54 countries. It found that the number of big groups willing to launch takeovers of than US$500 million (369 million euros) had doubled in 12 months to 27 percent of the total. Those willing to do deals of more than US$1.0 billion had doubled to 12 percent.
Emerging Markets, Mature Economies Targeted
Their willingness to take on debt to finance deals was the highest for five years.
Many companies are under pressure from aggressive shareholders to cut costs, and this could make company boards highly selective in looking at targets.
“After a prolonged financial crisis and MandA market malaise, companies and boards are opting for quality rather than quantity,” commented the head of merger and acquisition activity in France for EY, Rudy Cohen Scali.
Recently U.S. and European companies have led M&A activity, but emerging companies could begin to play a significant role, led by China and India, the report said.