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Crisis? What crisis?

06 October 2014

European boardrooms have been amassing cash, but there are signs that M&A activity may be picking up and that Frankfurt moves to stimulate growth could be good news for equities and corporate growth.

European corporates are in rude health, despite – or even irrespective of concerns over stagnant growth levels in the eurozone. As the European Central Bank (ECB) tries to encourage banks to lend more to help kick-start the bloc’s stagnant economy, corporate Europe has amassed large cash piles. However, some of the region’s leading companies have recently announced a series of high profile takeover deals funded by these growing war chests.

Deloitte reports that European companies added €47 billion to total reserves during the past year, as the culture of preserving cash continues to grip boardrooms in the aftermath of the financial crisis. The cash levels also reflect looser conditions in the corporate bond markets, as borrowing costs remain low and Europe’s corporates are able to access cheap finance.

However, the pattern is not constrained to Europe, with the top 1,000 non-financial companies worldwide holding $3.5 trillion in cash reserves, up from $2 trillion in 2008. Deloitte report that the cash hoarding has accrued from cutting down on investment, from closing operations and reducing staff numbers, to selling businesses and shelving technology and building expenditure. EU policymakers are concerned that corporate Europe is gripped by a type of Catch-22: a lack of investment could constrain growth, but firms do not want to invest unless they see that growth is underway.

It is understandable that boardrooms are building up their cash reserves. Europe’s recovery looks to have stalled this summer, while the ECB has signalled it will take more aggressive steps to stimulate growth. Moreover, the deepening crisis around Russian foreign policy in Ukraine and, potentially, other former Soviet bloc satellites, together with conflagration in the Middle East, have added to the geopolitical pressures on the region. (Scotland’s recent referendum on independence from the rest of the UK has also stirred some of the continent’s long-standing nationalist disputes, particularly in Spain and Italy.)

There has though been some recent high-level M&A activity in Europe’s boardrooms, even if the levels have so far this year trailed those across the Atlantic.

“If European companies want to achieve double-digit growth, then they need to consider M&A activities as part of their growth strategy,”

says Ian Macmillan, head of M&A at Deloitte in London.

Siemens, the German industrial giant, has acquired US turbine-maker Dresser-Rand for $7.6 billion1. The move is an attempt by Siemens to profit from the investment boom triggered by discoveries of shale gas in the US. Dresser-Rand was a top holding for Tye Bousada of Edgepoint, co-manager of the St. James’s Place Global Equity fund who comments:

“Siemens is likely attracted to the same industry-leading equipment and the valuable service network as we were. The bid accelerated the return we thought we could realise as long-term owners of the business. Although we ultimately think the business could be worth more in five years, we were happy to sell it for a large premium to their current earnings power.”

German chemical giant Merck has also looked to make a transatlantic move with plans to buy US lab equipment maker Sigma-Aldrich for $17 billion1. Another of Germany’s industrial giants, Bayer, is planning to make waves in the initial public offering market (IPO), with a float of its plastics business that would be the biggest European listing with a value of at least €8 billion.

Meanwhile, the ECB continues to offer almost free money to banks in an effort to prime lending and stimulate growth. But in September, in the first of its series of loan offerings (called targeted long-term refinancing operations) just €83 billion1 was taken up, underlining the weak growth in the eurozone with inflation trailing at less than 1%.

Worryingly, some six years since the start of the eurozone crisis, central banks are still having to boost markets. The ECB president Mario Draghi is moving in the opposite direction of the US and UK, and is poised to launch its €750 billion asset-purchase scheme. But the ECB’s version of quantitative easing (QE) will be positive for equities, which in turn should act as a further boost to Europe’s corporates and investors. The depreciation of the euro as the dollar strengthens could also help European companies grow profits. And this just might encourage their boardrooms to start to spend too.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.

Source: Bloomberg, September 2014

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