My finance view

Investors eager to cash in on the prospect of a revival of merger & acquisition (M&A) activity could see their efforts go to waste as access to financing remains a major obstacle hampering bids.

Analysts urge caution against being too quick to buy into M&A target plays on the prospect of sweetened bids or successful deals, as holding on to them may be of little value in the long run in the absence of catalysts to drive M&A activity.

Equity markets were given a boost by the revival of long-mooted bid plans, including a $16.7 billion bid by Kraft Foods Inc for Cadbury Plc and Abbott Laboratories’ $6.6 billion bid for Solvay SA’s pharmaceutical unit.

Last Thursday, Cisco Systems Inc offered to buy Norwegian video-conferencing equipment maker Tandberg ASA for $3 billion, the latest in a rash of corporate takeovers after a lean period of a year and a half during the financial crisis.

The prospect of a sweetened bid has helped Cadbury’s share appreciate almost 41 percent since the Kraft plan was first mooted in early September as investors sought to cash in on a revised offer for the confectionary firm.

Analysts, however, argue many would-be bidders face a bumpy ride in securing financing for M&A deals, leaving investors with little prospect for making gains on the back of enhanced bids.

“The heavily leveraged debt finance vehicles which were used to fund M&A activity up until summer 2007 are just not there any more,” said Peter Dixon, economist at Commerzbank. “Nobody is prepared to load up on debt and banks are very wary of finance.”

M&A HYPE

Despite the hype surrounding the re-emergence of M&A deals, global activity remains low. The value of deals fell 54 percent to $369.3 billion in the third quarter from the same quarter in 2008, according to Thomson Reuters data.

Howard Wheeldon, partner at BGC Partners, said he did not expect a real resurgence until well into 2010.

“Funding remains difficult, with rights issues for acquisition purposes acceptable if properly reasoned as a sensible consolidation opportunity, but only to a much lesser extent for strategic reasoning,” Wheeldon said.

As European shares had 45 percent of their value wiped out at the height of the financial crisis at the end of 2008, the argument that stocks were cheap gained supporters.

By August last year, stocks in the DJ Stoxx 600 index .STOXX were trading on just 6.8 times historic earnings, according to Thomson Reuters data. Since then they have clawed back to trade at around 14 times, near levels seen before the crisis first struck in June 2007, casting doubt over the argument that target companies are still cheap.

“Markets are well overvalued right now given the immediate outlook and prospects … a mini bubble if you like and one that at some point is bound to burst,” said Wheeldon.

Still, the prospect of M&A has the ability to further boost markets to drive higher as bid talk hots up. 

Read more