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What's Up With M&A?

June 30, 2005
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Around the world, companies large and small seemed ready and willing to play one rowdy game of "Let's Make a Deal."

In the fourth quarter of 2004, announced merger volume had surged a mighty 45 percent over 2003 - and to the highest level since 2000. For some time prior to the rise, corporate scandals, the troubled economy and quite a sluggish stock market forced many companies to exercise caution and focus on the bottom line instead of new acquisitions.

But by late 2004, companies would once again call on strategic mergers to cut costs, pump up efficiency and reach into new territory.

Here are some factors expected to influence global mergers and acquisitions (M&A) for 2005:

• Money at hand. Corporations have amassed staggering amounts of cash. Some 60 percent of U.S. mergers in 2004 were cash deals, compared with about 35 percent in 2000. Furthermore, companies in the S&P 500 are holding a record $2 trillion in cash and short-term assets.

• A weaker dollar. The decline of the dollar against other world currencies renders U.S. assets relatively inexpensive in the eyes of foreign investors.

• Stricter rules. Tighter corporate governance standards, as well as demanding shareholders, are forcing struggling CEOs and their boards to consider unwelcome bids. Board members beware: The shareholders of 66 companies voted to repeal their boards in 2004.

As we go further into 2005, last year's class of mergers could very well trigger even more deal-making. As industries consolidate, competing businesses feel the pressure to keep up.

No company likes to lose its No. 1, No. 2 or No. 3 market position to a streamlined, newly formed partnership. Thus, many investors have been listening to the merger announcements of influential companies with renewed interest.

The promising increase in M&A activity could mean that businesses are now reaping the benefits of a healthier economic environment, and are again poised for growth.

Craig G. Langweiler is president of LFG, a financial group located in Newtown. He can be reached at: clangweiler@americanportfolios.com.

 

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