A friend of mine once told me that ‘the markets can remain irrational long than you can remain solvent’.
My bet so far on the recovering M&A market is a case in point. In theory the Mergers and acquisition (M&A) market should be strong right now. The pre-conditions for a strong M&A market are certainly there. Relatively cheap financing, strong corporate confidence in the business outlook, and lastly corporations themselves are sitting on record cash balances. In the past these factors have fuelled an M& A boom. Not this time. Instead companies are tapping the high yield market to refinance and pay high dividends instead of doing deals. According to Capital IQ only 25% of corporate loans are going to M&A, whereas in 2006 when interest rates were also low the ratio was 60%. One banker believes that refinancings and recapitalizations are even competing with M&A.
I am sticking with its forecast that eventually this year the M& A market will pick up. With economic growth worldwide below long term growth levels, corporations know a vital way to grow is by buying companies to help growth. One of the key bets of mine this year has been Lazard, an advisory firm that has taken market share away from the big players like Goldman, Morgan Stanley & JP Morgan. The bet has not paid off so far, Lazard is lagging the S&P 500 Index by 2% this year. But Lazard pays a 3% dividend yield, trades at historic low earnings estimate and has a stable asset management business that it can fall back on.
(For full disclosure purposes LME owns shares in Lazard based in Bermuda. Source: FT, May 15th 2013, ‘Low rates fail to spur M&A Boom’ by Gelles & Mackenzie)
