It was gruesomely apt that Chrysler and the media company Endemol should be sold this week, writes Tony Jackson. As the latest boom roars on, the skeletons from the last one come toppling out of their closets.
What possesses corporations to go on these synchronised buying sprees?
One factor sometimes misunderstood in this context is globalisation. We are often told that globalisation causes industry consolidation. That is true. But it tends also to cause the opposite — fragmentation. Consider a fictitious example. Say there are four camera makers in the US and four in China. For the first time, the US firms get access to the Chinese market and vice versa. Since the field is now more crowded, one of the four in each country gets taken over — consolidation. But that still leaves six competitors in each market where there were four before — fragmentation. So if you believe you have to be in the top three to survive, life just got tougher.
Take oil, where the old Seven Sisters — the big western producers — were whittled down to four by merger in the 1990s. Now, the rise in state-owned oil companies in the developing world has left those giants comparative dwarfs, with only 10 per cent of world production and 3 per cent of reserves between them. More consolidation to come, no doubt.
This provides a powerful motive for defensive mergers. But globalisation is not exactly new, nor does it proceed in spurts.
While share prices have not quite doubled since the depths of the bear market in 2003, global M&A in the first quarter of this year was three times its 2003 level. Companies are paying nearly twice the price on offer four years ago – and buying more at the higher price.
ABN Amro, whose shares were under $20 two years ago and are now nearly $50. Its latest full year earnings per share were almost unchanged from two years before. So why now?
It is depressing but not surprising to note that with the Dow at record levels, US corporations are also buying back record amounts of shares — $3bn-worth a day.
Not that it is all companies’ fault. The consortium bidding for ABN Amro includes RBS, whose chief executive was until recently effectively barred by his shareholders from even contemplating takeovers. However bid fever works and it extends to investors too.
At the back of all this is the simple fact that bids are still mostly for cash, and cash is in super-abundant supply. That is what is driving up the market and the appetite of corporations in a kind of vicious spiral.
If you believe these mergers have to happen anyway, you will not worry too much about the cost. If not, follow the old rule: sell the bid target for the best price possible, then sell the bidder as well.