Waving goodbye

A gigantic bout of dealmaking will draw to a close

Business

Over the past century and a half the Western world has seen seven great waves of mergers and acquisitions (see chart above). In the late 19th century, in the first such wave, firms combined to create national giants in metals, oil, railways and consumer goods that stretched from the redwood forests to the waters of the Gulf Stream. By the 1980s sharp-suited raiders who were too tough to have lunch used junk-bond financing to undertake hostile takeovers of conglomerates. In 2017 the latest wave of dealmaking will finally ebb. Mediocre bankers and bosses will twiddle their thumbs and rue lost fees and bonuses. Clever ones will try to imagine what the eighth wave of dealmaking, which will peak in the early 2020s, might look like.

The present bout of deals began in 2012, with $18trn of transactions announced since then (see chart). Dealmakers have reacted to the post-financial-crisis world of low economic growth, cheap money and caution. They have sought to axe expenses, boost market shares and cut tax bills. American firms have accounted for half of all activity. Combinations including Dow Chemical and DuPont, and Kraft and Heinz, are expected to yield over $100bn of annual cost savings in total. The health-care industry became addicted to “inversions”, with American firms taking over European ones to shift their legal domicile and cut their tax bill. Cross-border deals have aimed to create global monopolies. The $120bn purchase by Anheuser-Busch InBev of SABMiller will create a beer monster that sells almost one in three bottles emptied around the world.

This seventh wave of M&A will end in 2017 for three reasons. First, there will be a resurgence of antitrust regulation, just as there was in the early 20th century, as a growing body of analysis suggests that declining competition may explain low growth. Several deals in America have already been blocked, and AT&T’s proposed $109bn blockbuster bid for Time Warner will be an early test of the next president’s trust-busting mettle.

Second, populism will make deals harder. In some cases the hostility will be overt: Theresa May, Britain’s new prime minister, says she may block certain foreign takeovers. In other cases it will manifest itself through new technocratic obstacles. America’s Treasury is trying to stop inversions and the European Union is cracking down on corporate tax-dodging, too.

Third, because globalisation is going backwards, investors will get nervous about creating planet-straddling multinationals through deals, particularly given their lacklustre performance. The return on investment that America’s multinationals make abroad has dropped from 12% in 2008 to 8% today. The technology stars of the past decade have gone global without Wall Street’s rainmakers. Google, Apple and Facebook, which are among the world’s five most valuable firms, make a majority of their sales abroad yet have not done any big cross-border deals.

Pieces of eight

As the old wave of acquisitions peters out in 2017, the makings of the next boom will become clearer. Some sprawling Western multinationals will be unwound in the coming decade. Financial firms such as AIG, ING and Royal Bank of Scotland have already been partly dismantled. Other industries could be next. General Motors and Ford make, respectively, 92% and 90% of their profits in North America, which suggests that their foreign operations destroy value. So far investors have been tolerant of such sloppiness, but their patience will start to wear thin.

Forward-looking bankers will hop on a plane to Europe. If the continent muddles through Brexit and avoids another currency crisis, there will be inexorable pressure for its firms to merge in order to create regional champions. The continent’s companies have lost their seat at the top table of global business over the past decade: they are 40% smaller than American ones, measured by the median profits of the top 500 listed companies in each region.

Last, outbound deals will gush from China. Chinese buyers have already bought Italian football clubs, Swiss seed-manufacturers and American sausage-makers. But the incentive for Chinese savers and companies to diversify more away from their home market remains overwhelming. Of course, the experience of other countries and companies suggests that expanding abroad through takeovers is fraught with pitfalls. But then if dealmakers paid attention to the lessons of history there would have been only one or two waves of mergers and acquisitions in the past 150 years.

*Will the value of announced global mergers and acquisitions (M&A) deals during the second quarter of 2017 exceed those in the second quarter of 2016? Test your forecasting skills at the Good Judgment Open/The World in 2017 challenge, at gjopen.com/economist

You are reading a small selection of content from The World in 2018. To read all the articles in this year’s edition download The World in 2018 app.
Download 'The World In 2018 iOS app'
Download 'The World In 2018 Android app'