- Companies have doubts that future earnings growth will match shareholders' expectations, according to J.P. Morgan veteran Chris Ventresca.
- As a result, U.S. corporations are seeking to swallow competitors to fuel earnings growth, he said.
- U.S. deals activity, at $1.35 trillion through June, will probably reach a record this year, J.P. Morgan said.
U.S. corporations are more willing than ever to consider buying competitors amid private concerns they risk disappointing shareholders without making splashy deals, according to Chris Ventresca, global co-head of mergers and acquisitions at J.P. Morgan Chase.
“With every day that goes by, they have a strengthening portfolio and balance sheet,” Ventresca said of companies across sectors in an exclusive interview at J.P. Morgan’s headquarters on Park Avenue in New York.
The problem is that embedded in the aging U.S. equities bull market are expectations for continuing high earnings growth, he said. Analysts expect 2018 earnings to rise almost 20 percent from last year, according to FactSet. The ratio of stock prices to earnings, a valuation metric, has been climbing for the S&P 500 for most of the nine-year expansion. Companies began disclosing second-quarter earnings this week.
“They trade at a stock price multiple with high shareholder expectations to deliver extraordinary growth,” he said. “And when they look internally at their own business plans, they have doubts on delivering what their stock multiple is implying.”
That hunger for growth will continue to drive a record year in mergers, the 30-year J.P. Morgan veteran said. Led by takeovers in technology, health care and energy, U.S. companies are already on track for a record year. North American firms announced $1.35 trillion in deals through June, 67 percent higher than the first half of 2017. That has been driven by megadeals — the number of deals that are at least $10 billion surged 125 percent — and by cross-border transactions. Acquisitions between companies in different regions climbed 48 percent to $462 billion. About two-thirds of that activity was for target companies based in Europe, the Middle East and Africa, according to J.P. Morgan.
One threat is rising protectionism around the world as governments including the U.S., U.K. and the European Union take steps to scrutinize foreign investments on the basis of national security. The escalating trade dispute between China and the U.S. could also threaten deals between companies based in the two countries. Cross-border mergers make up roughly a third of the market, meaning that deals activity would decline if it was restricted by national borders, Ventresca said.
In the longer term, the mergers boom will probably pause with the onset of the next recession, which will cause companies to take less risks for growth, Ventresca said. But the next economic contraction isn’t likely until at least 2020, J.P. Morgan has said.
“As we look into next year, we still see things more supportive of M&A than dampening,” Ventresca said. “The desire to make better, stronger, more global companies remains.”