One of the big problems facing policymakers over the past few years may be starting to fade. With governments facing large deficits, and households in cautious mode in the face of high unemployment, authorities in most advanced economies have been hoping for some help from the people who have got money to spend – large companies. While smaller firms can still face daunting credit constraints, in terms of price or other conditions, larger firms have generally done okay during the past few years. In many instances, they have built large cash piles. Ideally, policymakers would like to see these used to finance new investment spending, or even hire workers.
Both of those are still relatively unlikely in the near term. However, there are signs that companies may now be opening their purses. Yesterday, in particular, saw a string of announcements where companies are planning to spend huge amounts. Instead of building factories or hiring staff, though, those large companies are engaging in another favoured pastime – mergers and acquisitions.
The numbers are quite striking. Vodafone plans to buy Cable & Wireless Worldwide for a bit over Â£1bn, Veritas will buy Thomson Reuters’ healthcare unit for $1.25bn, and NestlÃ© is weighing in with a bid of almost $12bn for Pfizer’s baby food. All of these were announced by Monday. After months of waiting and watching, some of the biggest and most important players in the global economy have made their move.
It says something, though, that these companies are pursuing M&A activity rather than organic growth. In fact, it is quite revealing – rather than use their funds to try to grow their existing business, managers have decided that a better bet is to take over a rival, merge the operations, and boost profits that way. This suggests that the CEOs of these large corporations, like just about everyone else, don’t expect strong economic growth over the next few years.
Mergers can be a good way to generate value for shareholders if the economy is flat lining. By combining businesses, there are normally economies of scale that can be exploited. In the short term, that often means job cuts; ultimately, there is no need for two HR departments in any one (well run) company.
This means that, while the deals could well be good for shareholders – although only time will tell on that front – they are unlikely to provide a meaningful spur to economic growth. Bankers and advisors will earn some nice fees from the acquisitions. But the trickle-down impact of these fees (and associated bonuses) will not be huge.
All in all, policymakers should be happy that large companies are spending money again. But the manner in which they are spending it suggests that, just like the rest of us, CEOs are not expecting robust growth any time soon.