‘Stock fever’ has gripped the capital markets. But you wouldn’t know it by reading the headlines.
The mainstream press loves it when prices tumble. Falls in the price of iron ore, coal and oil give them an excuse to run stories wailing about the billions ‘wiped off’ the wealth of companies and investors.
We can’t blame those journos for highlighting negative stories. That stuff sells newspapers.
But out in the real world, stock prices are hot to trot. And behind closed doors, dealmakers are using those prices to create billions of dollars of wealth out of thin air.
Following the money trail could lead you to some big stock market gains…
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The thin-air wealth creation we’re talking about comes from mergers and acquisitions (M&A).
Companies around the world are experiencing an uncontrollable surge of the urge to merge.
The conditions have been perfect. Stock prices have been high and borrowing costs have been ultra-low.
Overnight, US stocks in the S&P 500 [INDEXSP:INX] index notched a fresh record high. Positive economic data from Germany buoyed investors — and at the same time, inflation in Europe and the US remains benign. That gives central banks very little incentive to raise interest rates off the rock-bottom levels they have plumbed for several years.
It’s been a great time to be a stock market investor — not just for individuals, but also for companies. Healthy stock prices have encouraged acquisitive companies to make ‘scrip bids’ for targets.
A scrip bid is a takeover offer where the suitor offers shares in its company partly or entirely in place of cash. If a target company’s shareholders accept such a bid, those holders receive shares in the new merged entity.
These kinds of bids can indicate that a suitor company views its own stock price as ‘frothy’. Companies are mindful that scrip bids can send that negative message to the market — but at the same time, if they can make a case for boosting profits by cheaply swallowing a smaller competitor, the market can take the message positively. It’s a balancing act.
More companies are choosing to walk that tightrope this year than at any time since 2007. Global M&A has just burst through US$3 trillion for the first time since the financial crisis. The value of deals this year has exploded by 27%.
A pair of giant tie-ups in the US pushed the volume of deals past that mark. In the biggest deal of 2014, maker of generic drugs Actavis plc [NYSE:ACT] has just agreed to buy Botox maker Allergan Inc [NYSE:AGN] for an eye-watering US$66 billion. And in the energy sector, Halliburton Company [NYSE:HAL] has snatched up its oil-services peer Baker Hughes Incorporated [NYSE: BHI] for a comparatively modest US$34.6 billion.
Closer to home, a number of sharks are circling Ten Network Holdings Ltd [ASX:TEN] as the TV network shows signs of recovery off a low base.
The more conservative elements of the mainstream media are pointing to this M&A activity as a sign of a peaking market. We don’t buy that. We can understand what drives that mindset. but it doesn’t mean they will be proven right…
The dice are loaded
Central banks around the world have encouraged this behaviour. When you load the dice in favour of risk-taking — as the banks have done for years now — of course companies will take advantage.
Most criticism of big-ticket mergers rests on what might happen if interest rates go up. If companies like Actavis or Halliburton find that their cost of capital rises, then the earnings of their newly acquired subsidiaries may not grow quickly enough to cover that cost of capital.
But the central banks don’t just play this game — they write the rules. And right now the rulebook says ‘keep rates low’. Despite what bearish pundits have insisted about what is ‘inevitably’ going to change next year, the policy-makers are not showing any signs of changing course.
And why would they? Inflation is low and unemployment is higher than it should be. The central banks will continue to encourage companies to take risks and borrow money next year — safe in the knowledge that if things go a little pear-shaped, they can always print more money to ease investors’ fears.
That means the M&A train will keep rolling. Whether you can profit more by holding shares in an M&A suitor or target is a question for another day…but for now, the surging confidence of the capital markets looks like good news for stocks.
Cheers,
Tim Dohrmann,
Editor, Money Morning
The post Catching This Stock Fever Could Make You Rich appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
