Prepare for Surge in Mergers and Acquisitions: Strategist

Low levels of leverage, the availability of bank capital and improving business confidence should presage a renewed surge in corporate mergers and acquisitions, according to an equity strategist at HSBC.

Debt-to-equity ratios are at 20-year lows, down to 43 percent from 60 percent at the height of the credit bubble. Following rapid deleveraging after the bubble burst, non-financial corporates have kept their powder dry. Leverage in the US and in Asia ex-Japan are at record lows of 40 percent and 20 percent, respectively.

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“If you look at the extent of the de-leveraging that we’ve seen, it is huge,” Robert Parkes, senior equity strategist at HSBC, told “I don’t really see that deleveraging process continuing… that process is coming to an end."

“Some people argue that there is a leverage problem in the household sector in developed markets, there’s a leverage problem in the government sector, but in terms of the listed corporate sector there isn’t a leverage problem, far from it,” he added.

The value of global deals in the first quarter of 2011 rose seven percent quarter-on-quarter to $535 billion – a high for the current cycle, which began in the second quarter of 2009.

North America led the increase, with a 62 percent rise in deal value against the last quarter of 2010, HSBC research shows. This is still lower than the peak in 2007 and 2008, but encouraging, Parkes said.

Improving business confidence indicators, as well as cheaper debt, are likely to mean that this trend will be sustained, according to HSBC’s annual M&A outlook report.

“If you are a large cap company, banks are more willing to lend to you, and the cost of the debt is incredibly low for an investment grade company; in fact, lower than the height of the credit bubble,” Parkes said.

Some commentators have noted that while banks are increasingly willing to put up cash for large-cap companies, they have been reticent in lending to smaller businesses, which could lead to a two-speed recovery across the corporate space.

“I think there could be something in that,” Parkes said. “For small companies we’re not really seeing any kind of loosening of the lending standards right now. For large and medium things are loosening up. I think banks are being a bit more discriminatory than they were during the previous cycle.”

Even though the aggregate value of M&A is up, the absolute number of deals is down by seven percent, the bank’s research shows.