US cable operator Comcast has announced a £22.1bn bid for Sky, potentially thwarting a planned takeover by 21st Century Fox. At the same time, Warren Buffett has said cheap debt is fuelling a ‘purchasing frenzy’ of M&A activity, driving prices of ‘far from spectacular’ businesses hit an all-time high. If M&A activity has provided a support for markets, could this be about to disappear?
- As M&A activity appears increasingly frenzied, should investors be worried?
- Warren Buffett said cheap debt and macho CEOs have fuelled activity
- Technology disruption and tax changes are also fuelling activity
In his annual letter to Berkshire Hathaway shareholders, Buffett said that buyers had become less and less price sensitive and many of the deals they had reviewed during 2017 had far too high a price.
He believes this is partly because of the nature of CEOs, who tend to be self-selecting go-getters. When encouraged by the market to do deals, he said: “it's a bit like telling your ripening teenager to be sure to have a normal sex life." Cheap debt has also been an important factor. Companies can refinance for lengthy periods at low cost.
Should investors be worried? After all, we are currently seeing a shift in the economic climate, and a likely tightening in monetary policy conditions across the globe.
Certainly, investment bankers don’t appear to be concerned. Data from Thomson Reuters showed worldwide M&A activity exceeding $3 trillion for the fourth consecutive year, and most believe it will continue to accelerate in 2018. Marc Nachmann, co-head of global investment banking at Goldman Sachs, told the Financial Times that “the momentum around large deal activity would continue into next year as we see a number of industries undergoing massive strategic shifts and further consolidation.”
This – perhaps more than cheap debt and testosterone-fuelled CEOs – is likely to drive M&A activity in future. Companies are trying to defend themselves against the relentless march of technology. For example, CVS Health’s bid for healthcare insurer Aetna was fuelled by the prospect of Amazon’s entry into the pharmacy business. The march of Netflix and Facebook is also likely to have played a role in changes in Rupert Murdoch’s sporting empire.
Then there is US tax reform, which is likely to see more corporates with more cash. Not all of this will go on M&A activity, but some undoubtedly will.
As such, prices may be high and M&A activity may have an ‘end of cycle’ feel about it, but it is difficult to see it diminishing any time soon. Disruption continues across many industries and US corporates are flush with cash. This will continue to drive activity for the foreseeable future.