M&A activity to boost equity markets

Growing merger and acquisition (M&A) activity and increasing investment suggest that firms are finally putting their massive cash piles to work, a trend which is likely to give equity markets another leg-up towards the end of the year.

Deals such as Verizon’s $130bn (€98bn) swoop for the rest of its US wireless business have pushed this year’s global M&A volume to $1.56 trillion, up 1% from the same period last year, according to Thomson Reuters data.

Combined with an uptick in capital spending by US and Japanese firms, they reflect improving corporate confidence which is encouraging companies to spend some of their dormant cash.

That may help give a fresh impetus to world stocks. After hitting a five-year high in May and recovering from a June sell-off, the MSCI world equity index has been trading sideways.

“With an improved economy companies get more confident. And their willingness to spend money increases. It’s very positive for equity markets,” said Gabriel Bartholdi, strategist at Swiss private bank J Safra Sarasin in Zurich.

“When companies start to reinvest it shows their confidence for growth. It shows demand is coming back, which will boost earnings.”

Since the crisis, corporates have deleveraged and built up a huge savings pile. Companies worldwide now hold $6.7 trillion of cash and equivalents on their balance sheets, more than double the amount a decade ago, according to Thomson Reuters data.

But there are signs companies are starting to spend some of the savings to grow their businesses via acquisitions and capital investment.

The Verizon deal and Microsoft’s move to buy Nokia’s phone business for €5.4bn are high profile examples of the M&A surge.

The benefit of capital expenditure — building new factories or upgrading equipment — often takes years to come through in revenues. Hiring new staff also doesn’t offer immediate rewards. But by reinvesting in their businesses, companies show they are confident about their outlook and that attitude can also boost stocks in the short term.

In order to fund product development and invest overseas — classic examples of capital spending — social network company LinkedIn is raising $1.2bn by selling shares.

Equity issuance is usually negative for a stock because it dilutes the stock. But LinkedIn shares have risen since the announcement, hitting an all-time high on Friday.

JP Morgan estimates nominal capital expenditure of US and Japanese companies rose slightly to $1.2 trillion and 37.39 trillion yen respectively at the end of March from the fourth quarter.

Capex in the US, Japan, Britain and the eurozone (G4) stood at $2.9 trillion at the end of March, slightly lower than late 2012.

“We had been expecting a capex increase in Q1 which did not materialise, which was a disappointment. But there may be a better picture in Q2 or later this year,” said Nikolaos Panigirtzoglou, managing director at JP Morgan.

“We should see an increase from Q2 onwards across the G4. M&A and buybacks represent a background support for equity markets.”

According to an annual survey by the Association for Financial Professionals, around a third of companies which reduced cash balances cited an acquisition of a company, launch of new operations and increased capex as reasons.

- Reuters