M&A: Out of the frying pan... into the freezer?
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M&A: Out of the frying pan... into the freezer?

The M&A market has caught fire with a series of jumbo corporate deals. Bidders claim that these are compelling strategic transactions that will create long-term value. But the real reason may be fear that shareholders are now focused on weak revenue prospects. Buying earnings is a way for companies to prevent share prices that low policy rates have inflated from falling back to earth. But confidence is still surprisingly fragile. A couple more big deal failures could slam the M&A market back into the freezer and take the equity markets with it.

Investment banking 

At the start of the year, Richard Gnodde, co-chief executive of Goldman Sachs International and co-head of the firm’s investment banking division, presented to a gathering of CEOs of some of the firm’s biggest corporate clients in London. Gnodde knew that many of these executives faced the future with renewed confidence now that various big worries – the eurozone sovereign crisis, politicking around the US federal debt limit – seemed to have passed and signs of economic thaw were appearing in Europe finally to complement recovery in the US.

These executives were happy, too, that even as banks adjusted to new regulatory capital restrictions on lending, the capital markets remained wide open to them, offering very low rate, long-term financing. With high cash balances, many of these companies had their balance sheets in good shape with a substantial safety net against any renewed financial system breakdown. Most had seen their stock prices fully recover to pre-Lehman highs.

Perhaps to puncture their complacency, Gnodde’s presentation boiled down to a single question. With equity markets up at record levels and price earnings multiples close to all-time highs for many of these companies, even those operating on thin margins amid still weak economic growth in their home markets, what plans did the assembled executives have to boost their revenues?

Gnodde tells Euromoney: “Companies have done an awful lot of internal restructuring, increasing efficiency and taking out as much cost as they can.

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