quinta-feira, 10 de setembro de 2015
Patrick Jenkins: Make advisers pay when deals go wrong
Another week, another slew of megadeals. With tens of billions of dollars of mergers and acquisitions now being announced on a daily basis, 2015 is shaping up to be a near-record year for M&A.
Deals make everyone feel better, at least in the short term. Directionless chief executives suddenly look purposeful. M&A bankers delight in the gravy train of bonuses. And shareholders feel upbeat, as share prices rise. (It is a sure sign of an exuberant market when shares in both acquirer and target rise on the announcement of a deal, as they have tended to recently.)
Echoing previous booms, deals are being done at generous, sometimes ridiculous, valuations: exuberant chief executives are desperately seeking expansion in a low-growth global economy. Dealogic says deal premiums are running at their highest level for three years. Acquirers have been encouraged by inflated equity valuations, which can make stock deals attractive, and low interest rates, which ease cash financing. Bullish bankers have shrugged off recent market volatility, insisting that the dealmaking boom will carry on regardless.
History and common sense suggest they are wrong. Nervousness about the slowing Chinese economy, and overvalued markets, will continue to bear down on asset valuations. Meanwhile, interest rates in the US and UK are likely to start rising in the months ahead, potentially exacerbating market nervousness, especially in dollar-funded emerging markets. Interest rate rises are likely to be slow and steady. But clearly the days of ultra-cheap takeover finance are numbered.
The question, then, is not whether the M&A bubble will deflate, but how quickly. That in turn will clarify how many of the deals done at the peak look absurdly overpriced once testosterone levels have abated.
Two of the most recent takeover booms preceded the emerging markets bust of 1997 and the dotcom crash of 2001. Today the most bearish investors see a repeat looming, given the headiness of valuations in many markets, particularly technology stocks.
There is, of course, a so-what argument. Capitalism operates in cycles and downturns can be painful. Excitable companies and their investors may lose out. Hard luck.
But for at least eight years, free markets have been far from genuinely free. The M&A boom, like so many of today’s bubbles, has been inflated in part by the policy response to the financial crisis — not just directly, via cheap money, but through the personal financial incentives that are at play.
The adviser at an investment bank with a big lending operation may be tempted to drive through an M&A transaction with an eye on the loan fees — and correlated bonus accruals — rather than the merits of the deal itself.
Less observed has been the market distortion in M&A created by the tougher rules imposed on investment banks in the aftermath of the financial crisis. As the Financial Times reported this week, the regulatory crackdown — relating to capital, compliance and pay — has encouraged many advisers to leave their bank employers and set up alternative advisory boutiques.
These lightly regulated entities have far more of an incentive to push deals, regardless of merit, because individuals can end up with multimillion dollar windfalls from single deals.