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Five trends that could spark a global M&A surge

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Investors hunting for returns should closely monitor five trends that could spark an increase in corporate takeovers in coming months, according to asset manager AllianceBernstein (AB).

Mark Phelps, AB’s chief investment officer—Concentrated Global Growth, says that while the annual scale of global mergers and acquisitions was currently down on the past two years, the five trends could support a pickup in mergers and acquisitions activity as CEOs across regions and industries were compelled to consider deals to boost earnings.
 
These five trends are:
 
Cheap finance – “With interest rates at record lows, companies can easily find leverage to launch a takeover. We think European groups are particularly well placed because they can issue paper in the market with confidence that the European Central Bank will buy it,” Phelps says, referring to the ECB’s recent extension of its quantitative easing programme to include the purchase of corporate bonds.
 
Low growth – “Moderate economic growth globally and sluggish earnings growth in many regions could provide an impetus for acquisitions. Companies realise that if they can’t build revenue growth, they just might be able to buy it instead,” he says.
 
UK on sale – Phelps says the slumping pound is more than an export booster. After the Brexit vote, acquirers can find quality British businesses at bargain prices. In July, the volume of UK takeovers accounted for 27 per cent of global deals, according to FactSet. Less than a month after the Brexit vote, SoftBank of Japan agreed to buy ARM Holdings of the UK for GBP24.3 billion.
 
Japan is buying – “The SoftBank bid also illustrates the influence of relative currency movements on M&A. With the yen having risen this year by about 17 per cent versus the US dollar and about 14 per cent versus the euro, target companies are relatively cheap for Japanese buyers. And as the Japanese economy remains stuck, companies are compelled to purchase growth abroad,” says Phelps.
 
Chinese champions – “Chinese buyers are everywhere, looking to expand abroad and build world-class businesses as domestic economic growth remains stagnant and sources of finance are abundant. Prominent deals include China National Chemical’s US$43 billion pending acquisition of Syngenta of Switzerland, and Dalian Wanda Group’s proposed GBP921 million bid for Odeon & UCI Cinemas of the UK,” Phelps adds.
 
Phelps says that when investors are assessing a pending deal, it is important to make sure the buyer really understand how M&A is committed to investing in the business to grow.
 
“Execution is critical, as countless deals end up destroying value because integration proves much more complicated than expected. In selecting stocks for an equity portfolio, we would be wary of building an investment case just on a potential acquisition.
 
“However, if a company has a dominant franchise in an industry with high barriers to entry, strong management and clear drivers of volume growth, gauging the likelihood of a takeover can help underpin conviction in its stock – and provide a potential bonus to returns,” he says.

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