M&A can still be a troubling phenomenon, notes Tony Jackson in his Monday column – even with companies free to press on with strategic purchases in the absence of private equity jacking prices up.
What does it tell us about the health of the industry in question? The current spasm of activity in the brewing sector is one example.
The brewing industry, in the developed world anyway, is in systemic decline. All this feverish activity is the conventional response. In the long run, it will do nothing to address the underlying problem.
Parallels run from textiles, through to personal computers, to the automotive industry. Beer volume is in decline, with most now going through the off-trade – supermarkets rather than pubs. And beer price inflation in that channel was off 1 per cent in the past year at a time of sharply rising prices for raw materials. Notwithstanding deals aimed at boosting margins or tapping higher growth markets, in the long run the brewers have nowhere to go, notes Jackson.
In investment terms, all this need not be too depressing. Academic studies consistently suggest that value stocks tend to outperform growth stocks.
For, as Adam Smith famously remarked, mankind is in the habit of paying more for the chance of a gain than the chance is actually worth.
It all comes down to timescales. The merger game is fun to play for a while, but mind what it tells you about the fundamentals.