While merger and acquisition (M&A) activity hasn’t exactly taken off in the US, in Europe it has been completely flat for the last couple years despite having favorable market conditions (low valuations and interest rates) because companies have been focused on deleveraging (as have European banks, who haven’t been eager to lend). But American companies have about $974 billion in cash or cash-like assets parked outside the US that would be expensive to repatriate for tax reasons, and could be put to use for M&A.
“[M&A activity] usually arrives late at the party, but then typically provides a significant boost before eventually signalling exuberant market conditions and a market top,” writes Barclays analyst Ian Scott, but European M&A is taking longer than usual.
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M&A activity is usually higher in the US than it is in Europe, but it’s unusual for the two to be completely decoupled as they are now. European M&A activity picked up two years after the market bottom in 1993, and then again two years after the market bottom in 2003, but they’re now behind schedule just as the appetite for deals has returned in the US where there were $110 billion in announced deals in April, up slightly from $109 billion in announced deals in March, and far higher than the average rate of $43 billion since 2010. Even though the terms of those deals might change, and some will fall through entirely, the changing trend is clear. Since US equity markets have recovered ahead of European markets, we could see the same pattern of European M&A activity just needing a bit longer to get going.
US PRE could be used for M&A
But Scott also speculates that US corporations might start looking for deals abroad so that they can use permanently re-invested earnings (PRE) efficiently. There are some sectors, especially technology, where there is a big discrepancy between the amount of cash US companies are holding and the level of M&A in the last five years. Buying a European company might have been seen as too risky two or three years ago, when growth was still a long way off and sovereign debt was on everyone’s mind, but now there looks to be a lot of pent up demand for deals that could create value for shareholders or act as catalysts for stock re-ratings.