It is froth time again. Or at least that it what it looks like, for in recent months even the least observant follower of financial markets will have noticed that there has been a burst of bids, mergers and takeovers.
In one sense this is similar to the late 1990s, in that corporate activity is driving share prices back towards new all-time "highs". But it differs in three main ways. First, the types of business that appear attractive to suitors are rather different from the fashionable ones of the previous boom: public utilities and energy companies rather than internet-based services. Second, many more of the purchases are funded by cash rather than share issues. And third, the purchasers are much more likely to be non-national.
There is a particular clutch of bids that illustrate these themes. They include the Dubai Ports bid for P&O and the German E.ON bid for the Spanish energy group Endesa. There will be more for there are rumours of further bids, particularly for British energy groups such as Centrica and Scottish and Southern.
When you get a burst of takeovers and mergers, it is helpful to go back to first principles and see why this should be happening. Why should companies be trying to buy other ones now, instead of two or three years ago when share prices were much lower and accordingly would have been much cheaper? Is it just Keynes' "animal spirits", or are there more mundane forces at work?
Well, for a start there is plenty of money about. Five years of very low interest rates - negative in some instances - have created a lot of liquidity. That has been reflected in very low bond yields. It depends a bit on which country you take and, of course, the credit rating of the borrower, but large UK companies can borrow for 10 years at a real interest rate of 3-4 per cent, while eurozone ones can borrow even more cheaply than that.
Meanwhile, returns are high. The first graph shows the earnings yield on FTSE 100 companies, now about 8 per cent, and the falling cost of BBB debt. The gap is even larger for companies that are ranked AAA. So in money terms you can borrow at 5 per cent and earn 8 per cent. Kinda obvious what to do.
There is an international dimension too. Mike Lenhoff, at Brewin Dolphin, who pointed this out in a circular yesterday, notes that European companies, which can borrow even more cheaply than UK ones, have a particularly powerful financial incentive to buy British. He notes that earnings for FTSE 100 companies are geared to the international economy rather more than the British one and that earnings growth should be sustained for a while yet.
Besides, the size of the UK market means there is plenty of stuff to buy. The pie chart, from the new ABN Amro Global Investment Returns Yearbook, shows how the UK is the third largest market in the world and more than double the size of the French or German markets. (Actually, it was number two at the end of 2004 but the recovery in the Tokyo market has pushed Japan ahead.)
Taken as a whole, too, it appears good value relative to the other main markets, for price-earnings ratios remain well below the US and are comparable to the main continental markets, despite the UK's better growth performance and prospects.
All this points to a continuing global boom in mergers and acquisitions. But the most interesting aspect of this surge in mergers and acquisitions is the new element of purchases from the Middle East and three of the four Goldman Sachs BRIC club.
You may recall the BRICs exercise of Goldman, referred to a number of times in these columns. It is a computer growth model for Brazil, Russia, India and China, looking at the way in which these countries are catching up and passing the traditional developed nations. By 2050, on these projections, China becomes the world's largest economy, the US is second and India third.
That is a long way off but so far these countries are actually growing somewhat faster than the model predicted. With growth comes power. Buying foreign companies is one way of deploying that power. Last year CNOOC, the Hong Kong-based Chinese oil group, was rebuffed in its efforts to buy Unocal, a Californian independent oil company. US Congress forced it to withdraw.
Now Mittal Steel, run by the Indian family of the same name, is seeking to buy Europe's largest steel group, Arcelor. Technically Mittal is not an Indian company and it does not have many activities in India but already this bid has aroused a lot of opposition in France and in Luxembourg, where the state is the largest single shareholder.
Russia has yet to make substantial commercial acquisitions, although it has made a number of "trophy" ones, including in Britain the Chelsea football club and the car maker TVR. But it seems reasonable for Russia to use the surge in revenues coming from higher global gas prices to buy up western companies. There is a rumour that Gazprom is interested in Centrica and, if not that, expect something else.
As for Brazil, I have not seen anything significant yet. The obvious area for expansion would be for Brazil to use its experience in bio-fuels to acquire companies that could extend its reach to fuel-hungry continental Europe and the US. Expect something here too.
This phenomenon raises a host of questions.
An obvious one is: how much longer will these acquisition-fuelled markets run on? Bid fever has enabled the markets worldwide to shrug off enormous global concerns including bird flu, rising interest rates, Middle East uncertainties and, more generally, rising energy prices. Short of a catastrophe on one or more of these fronts, the hunt for valuable companies could run on for some while yet.
A wider concern is the political implication of non-traditional investors having more control over the developed world's corporations. Some countries, most particularly the UK, could live with that. Others, as evidenced right now in the US and Spain, clearly find it tougher to take. Even people who one assumes are fundamentally in favour of a liberal world economy can go a bit haywire. I see Hillary Clinton is now objecting to Dubai Ports having control over New York dock facilities, despite the fact that Dubai is one of the great practical examples of successful market economics.
And even here in Britain, there would be opposition to the Russians taking over our gas supplies - at least, I hope there would.
There are surely two big points here. One is that in a world where long-term bond yields are derisory, it makes sense to try to buy good solid companies. The UK happens to have quite a lot of these.
The other is that the new and rapidly developing world - in particular the BRICs - will play an ever-larger role in international investment. Some of this will be visible: takeovers and mergers. Other elements will be invisible, as portfolio investors in China, Russia and the like build their financial interests abroad. Asia's savings have to go somewhere and buying shares in developed markets will be one of those places.Reuse content