(March 19, 2012) — Corporate confidence and resurgence of merger and acquisition activity could spell positive returns for investors, capital market participants have said.
An upturn in the sector, which has been depressed for the last couple of years due to the tumultuous financial markets, could mean bonds held by investors improve in value, according to fund manager T Rowe Price.
The company said, in a note today on where to find outperformance in fixed income markets: “We anticipate a pickup in merger and acquisition activity, especially in the wireless communications and energy sectors, that could lead to additional capital appreciation.”
The market has some improvement to make. According to market monitor Dealogic, January 2012 saw the slowest start to a year for M&A since 2003. Global mergers and acquisitions volume in January was down 45% from a year earlier.
However, analysts at investment bank, Barclays Capital said: “Firms described an active level of M&A discussions, a clear pick-up from last year, but few announcements so far. CEO confidence is key, and Europe still an important variable.”
In terms of issuance, investor benefits should come in through the volume that is to be issued by companies involved in M&A activity.
The analysts said that funding was at record low levels, meaning businesses could tap debt markets very cheaply to fund takeovers. Although this initially might spell low returns for investors, high yield corporates – whose debt pays out more than ‘more safely rated’ issuers – had taken to extending the maturity of their debt and lowering the chance of default.
The bank also said that shareholder pressure on large companies to streamline would trigger spin off and carve-out deals.
One bank executive told Barclays Capital that he projected a slow steady build in M&A, more gradual than the previous two cycles where deal flow boomed into the tech bubble (1999-2000) and the leverage bubble (2006-2007). The scenario was steadier, more constrained growth over a longer period.
Barclays Capital analysts also raised the price targets it set on European banks by substantial margins. The analysts said several players pulling out of some sectors left market share on the table for competitors, who could improve revenue streams that have not recovered since capital market and trading activity dried up almost 12 months ago.