April - May 2007

As a distraction from the deteriorating condition of the US housing market, investors have turned to the accelerating boom in M&A activity for encouragement.

Shaping tomorrow’s corporate world
In the first three months of this year alone, M&A deals topped the $1,000 billion mark, a quarterly record. During that time, deals with a value of some $1,130 billion were announced, representing a 14.5% increase over the same period in 2006 and around one third of the value of all deals transacted during the whole of last year. This activity is not confined to the deals in European banking and elsewhere currently making the headlines, but is taking place throughout the economy and on a global scale.

This surge in M&A is spearheaded by private equity firms, eager to capture and then release, at a profit, the hidden values they perceive in their targets. But an increasing number of traditional corporations are also participating in this development, encouraged by, among other things, relatively cheap financing. Analysts in the investment banking industry, which profits hugely in fees from M&A, predict that the boom will continue during 2007 and beyond.  

Swings and roundabouts
Is this good news? Not necessarily. After a merger or acquisition is complete, its success may be hampered by integration problems, to which cross-border deals, where cultural assimilation is essential, are especially prone. Potential synergies may not be addressed, and inefficiencies caused by the overlapping of operations or retention of redundant employees allowed to persist. Conversely, the new owners may be too swift to trim operations and headcount, thus limiting the loyalty potential of remaining staff (who’s next?) and risking a loss of expertise, as key personnel look elsewhere for more secure employment.    

Aside from its purely financial aspects, M&A also has economic and social consequences, especially in those deals where the realisation of synergies is paramount. In mergers that result in duplicate operations, for example, personnel cuts are almost inevitable, swelling the ranks of the unemployed and contributing to lower consumer spending. Also, industry consolidation means less choice for the consumer and other “end-users”, even though most countries have some sort of monopolies watchdog to ensure that this is contained as much as possible to preserve open competition in a free market.

For investors, though, M&A is a decisively positive phenomenon overall. At the time of writing, equity markets continue to be buoyed by a frenzy of M&A activity, and this has helped to turn investors’ attention away from the rapidly imploding US housing market – at least for now.