New trend for share-price gains after takeovers may be short-lived when interest rates rise
As organic corporate growth remains slow or stagnant since the financial crash, investors have turned to rewarding companies for the second-best move of acquiring other companies, reversing a well-established trend.
Throughout 2013, companies that announced acquisitions saw their share price rise by an average of 4 percent within 24 hours, the Financial Times reports, citing data compiled for the paper by analytics group Dealogic. The increase marks the largest ever recorded and is 50 percent higher than gains made in 2012.
It also marks a sharp reversal of a long-term trend that has seen share prices drop the day after an acquisition announcement since at least 1996. Organic corporate growth, which has traditionally been chased by investors, has slowed or stopped in still-sluggish economies worldwide while takeovers have been encouraged by cheap financing.
‘Investors love to see organic growth but, when they can’t get it, they are going to reward those companies that use acquisitions to grow,’ says Scott Barshay, an M&A lawyer at Cravath, in an FT interview.
The newspaper also quotes Steven Barg, head of M&A capital markets at Goldman Sachs, as predicting that the trend for rewarding companies for acquisitions will be short-lived because interest rates, now at historic lows, are expected to rise.
‘If money is cheap, investors want a company to have high operating and financing leverage; you are buying earnings cheaply and people believe earnings will grow,’ explains Barg. ‘When the cost of debt substantially goes up from here, the share price rises we are seeing will be moderate. It is a question of economics.’
The increasing power and prominence of activist investors may also be scaring companies into using cash to undertake acquisitions, the newspaper says. Companies with large cash reserves face rising pressure and boisterous proxy battles from activist investors seeking to force them to boost dividends or better allocate the cash.
A survey of investors released by Bank of America Merrill Lynch this week concludes that 58 percent of investors want companies to devote excess cash to capital expenditures while only 11 percent call for cash preservation.
