Murders & Executions? No, Mergers & Acquisitions are booming
What's going on?
We all remember Patrick Bateman, don’t we? Well, he worked in mergers and acquisitions (M&A). And that business of companies acquiring one another is booming at the moment. The boom is being driven by some very big companies being bought by even bigger companies, for example Shell’s acquisition of BG Group.
What does this mean?
We have been reporting a lot about interest rates lately. Here is an example of what impact low interest rates have: low interest rates make it cheaper for companies to borrow money that can be used to pay for buying other companies. Most M&A activities happen because costs can be cut by combining two companies (e.g. jobs can be cut because fewer people are needed in a combined company versus in two individual companies). But cost-cutting only brings short-term benefits to companies. So there remains a risk that companies are not investing enough in producing future profits, for example by developing new technologies or buying new equipment. This type of investment in the future remains at a historically very low level relative to the revenues the companies are producing. This is problematic for future profits.
Why should I care?
M&A activity can boost share prices in the short term. As the boom continues, expect it to be positive for stock prices, particularly of medium to large sized companies.
But if companies don’t invest in future ‘capacity,’ e.g. the ability to create profits in the future, their attractiveness as investments will diminish in the long-run. This is likely to be a problem that will manifest itself in the stock markets only in the medium to longer term.
Originally posted as part of the Finimize daily email.
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