What does M&A Trend Say about the Global Economy?

May 27, 2016

By HV

On one side we have the hunters. Bayer, Midea Group, Takeda Pharma, Fujian Grand Chip Investment, Arbor Pharma, FedEx, Dell, ChemChina, Pfizer, AB InBev, etc. And on the other side, we have the targets. Monsanto, Kuka, Valeant, Aixtron, Xenoport, TNT Express, EMC, Syngenta, Allergan, SABMiller, etc. Together, they’ve created a wave of M&A that raises a red flag for the global economy.

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The global economy is slowing down, and the markets are getting more competitive. Mergers and acquisitions offer a way to survive in this harsh environment. But mergers and acquisitions lead to consolidation, and consolidation means fewer players on the playground.

“There are M&A-transactions for different kinds of reasons. Over the last few years it was all about to put the hughe cashpiles into work. Buying smaller competitors with cash for a lot of companies was less expensive than to grow their businesses organically,” said Lorenz Burkhalter, a Swiss financial analyst with a daily column on the financial portal cash, and a Sentifi influencer.

Among the mergers are the hard-to-miss mega-mergers, the ones that cost billions of dollars. The purposes vary from mergers to mergers as well. Tax evasion is definitely one of them.

Merging with companies from a region with lower corporate taxes can help save hundreds of millions of dollars a year. And it serves as a carrot on the stick for many mergers including the failed Pfizer‘s acquisition of Allergan.

The other reason is it helps with expanding into fields that are not considered strong suits of a company. For example, Midea Group has expressed interest in acquiring Kuka, the world’s leading manufacturer of industrial robots. The acquisition would serve as a great gateway to the industrial robotic field and turn Midea into a high-end manufacturing powerhouse.

“Buying smaller competitors with cash for a lot of companies was less expensive than to grow their businesses organically.” said Burkhalter.

Another reason for mergers is to fight off competition.

“You have Chinese companies and investment vehicles buying strategic assets—ChemChina for seeds maker Syngenta or HNA Group for caterer Gategroup for example. It’s all about getting grip in new markets and fighting off more intense competition these days. Then you have companies streamlining their portfolios, selling parts to other rivals or private equity firms. Most firms can access cheap money now, especially in Europe thanks to corporate bonds buying by the ECB,” Burkhalter said.

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The markets tend to see a boom in large mergers and acquisitions as they edge closer to a global financial crisis. And the pattern seems to exist here with the mega-mergers.

“Looks like we’re close to such a moment with Dell-EMC, Syngenta-ChemChina, Du PontDow Chemical and lately BayerMonsanto. And don’t forget called-off Pfizer-Allergan. So we’re having kind of a red flag moment now,” Burkhalter concluded.

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You can reach Lorenz Burkhalter at his Twitter account @cashInsider. He offers great insights into the financial markets and is very responsive.