The market is always open for analysis and investors are trying to read into every little detail to find an edge over competitors. Now, some have been caught by the recent activity in the M&A sector. After the failed and somewhat surprising bid by Kraft Heinz for Unilever last week, investors are considering whether the sector is headed for another ’07.
Cause for concern
Quite a few prominent investors have questioned the current market behaviour, especially in terms of company activity on the market. According to Jeff Ubben, the found of ValueAct, the week has been a revelation – companies are becoming too active. He spoke to a Reuters Newsmakers panel on Wednesday and warned that the stock market might be luring the companies to “do the wrong thing”.
“The private equity guys made the top in’07. They were buying everything and they learned their lesson. The corporations didn’t play the ’07 game and now they are going to make the top,” he told the panel. According to The Street, Uppen said his plans are to disinvest. “I’ve got $3 billion in cash. I’m disinvesting. The stuff we’re finding is not thematic. It’s very specific,” he noted.
Perhaps the signs are not there
The other view runs counter to the investors warning about the looming dangers. Stephen Foley wrote about the topic in Thursday’s Financial Times, pointing out the fact the evidence doesn’t fully support the negative view of the sector
His first point was purely about the current numbers. M&A transactions involving US companies last year stood lower since 2005. The recent activity has been largely driven by the larger companies, which has meant the valuation would be higher than if the activity is driven by smaller companies. Nonetheless, the total deal value last year stood at $2tn. Yet, this was still below the levels in 2015.
To Foley, even the pre-crash conditions just aren’t there – cheap capital and unchecked leverage and regulations drove the activities. Right now, the market is not showing similar signs.
The investors themselves continue to maintain caution. As the Preqin report highlighted, investor concern is focusing on valuations. The possibility of high valuations will not mean sunny days are ahead for the stock market.
China to lead the way?
However, there is optimism in the sector and M&A activity is expected to increase, especially when it comes to China. China Daily reported on a recent study by PricewaterhouseCoopers, which showed Chinese private equity and venture capital to boost M&A activity in the region. If the analysis is correct, the rise in activity would come after a record in deal value in 2016.
Nelson Lou, an advisory leader at PwC Beijing, told the newspaper the growth was down to investors pursuing “overseas assets ‘with a China angle’, aligning with their growth strategies”.
The mood over market activity is split, which isn’t a shock to anyone who follows the industry. Time will tell which side of the argument pulls through as the winner – the market can also throw in a few surprises along the way.