Company Takeover Frenzy

Submitted by Marco on 6 December, 2006 - 10:01

Have you noticed the number of company takeovers lately? Macquarie Research Equities (MRE) have noticed the trend and have made the following observations. They note that the current takeover and rumour frenzy has had its equivalent in the past, namely the year of 1986. They note that there are similar drivers to the takeover frenzy as there was in 1986. There are two drivers to the phenomenon.

The first economic characteristic is that there were a lot of companies with slowing growth profiles and strong free cashflows. As a result these companies needed to make acquisitions to sustain their growth profile. In recent times, the strong company balance sheets are "creating nervous managements who are keen to justify their roles by looking for the next add-on growth saviour." The second economic characteristic was the financial climate. There was strong lending by the banks in 1986. 1986 was a noteworthy year for financial deregulation which prompted a lending surge by local banks to "stop overseas banks gaining a foothold." More recently, strong lending is generated by the many years of "loose monetary policy in the US". In both economic times, banks have "switched from lending on strict criteria of asset backing to the much more aggressive unsecured approach based just on projected cashflow. Bonuses were paid on the amount of lending not the ability to control risk. They eventually paid for this lax approach last time, with the economic downturn of 1991 and near bankruptcy for two majors."

Such was the frequency of takeovers and rumours in late 1986 that the poorly managed stocks almost all rallied. The market took on the assumption that fundamentals didn't matter anymore, which led to a build up of huge overvaluation by late 1987 and the eventual correction. Those investors that followed the takeover herd into poorly managed takeover targets did very well for a while. However, they then uniformly got smashed in the crash when the quality franchises immediately reasserted market outperformance and kept that for many years thereafter.

A further similarity with 1986 was the then round of media consolidation, which was part of the catalyst for the eventual takeover mania. Most of then listed media vehicles disappeared into new owners. News Corporation bought the local Herald and Weekly Times, for example, when the major strategy for news at the time was rapid expansion offshore.