Bullish notes: US companies report robust M&A demand

Half of the companies in the Fortune 500 expect to be active in US mergers and acquisitions next year, according to new research.


"The bullish signs regarding M&A demand extend well beyond the Fortune 500," says Greenwich Associates consultant Jay Bennett. "Forty-five percent of all large US companies expect to use an external advisor on a domestic M&A transaction in the next 12 months, and nearly a quarter expect to hire an advisor for an international transaction."


These comments are based on the results of Greenwich Associates' 2005 Corporate Banking research study. The findings have been presented in a new Greenwich Report, which reveals that 30 per cent of large (and typically public) US companies plan to do a domestic public bond offering in the next year, while only 10 per cent plan to engage in a common stock transaction.


The report also examines the continued reduction in the number of sell-side equity analysts covering some US companies, changing documentation practices for Sarbanes-Oxley, and developments in the disaster recovery planning of large US companies. In addition, the report presents Greenwich Associates' latest research on corporate financial practices, balance-sheet management and compensation levels, and advises companies on compiling and using their organizational spending "wallets" in negotiations with their banks.


Analyst Coverage and Earnings Guidance


US companies in 2005 continued to report reductions in the numbers of sell-side analysts covering their companies. More than 20 per cent of larger, publicly traded US companies say the number of analysts covering them declined over the past 12 months. These reductions come on the heels of analyst cutbacks reported by more than 20 per cent of companies in 2004 and almost 30 per cent in 2003.


"The reductions have been most pronounced in the smallest companies included in our survey, which have annual sales of less than USD 2.5 billion," says Bennett. "Among these companies, more than a quarter experienced a reduction of coverage in the last year, as did about 25 per cent of below investment-grade companies."


At the same time, the portion of US companies offering earnings and financial guidance actually increased, from 54 per cent in 2004 to 60 per cent in 2005.


"Although many will see this result as a positive finding for market transparency, the research also suggests that a countervailing trend might be at work," says Greenwich Associates Corporate Product Manager Marc Greene. "One in 10 US companies says that it has plans to reduce or cease providing these communications in the coming year."


Leveraging the Organizational Wallet


Companies are in a competition for the attention and resources of their banks. Although it may seem counterintuitive that paying clients should be competing with one another for the resources of their service providers, it nevertheless is true. In the late 1990s and early 2000s, CEOs, CFOs and corporate treasurers actually took this competition as a given, and companies routinely rewarded banks that provided credit by selecting them to provide services and products that earned the banks a higher profit margin than lending.


With access to capital a less pressing concern in today's relatively easy credit environment, it would be simple to assume that the competition for bank resources has slackened. This is not the case.


"Although companies might not be aware of it, they are actually competing against their peers for banking resources more than ever before," says GA consultant John Colon. "In fact, the competition has spread from credit into cash management, treasury operations, equity and debt underwritings, M&A advice and every other service and product that companies want from their banks."


Why is this so? Because banks' profit margins have been eroding in many areas of their corporate business.


"Banks have made a decision that is entirely rational," says Bennett. "Because they are making less money on certain products, they are cutting back on the resources they invest in these businesses. But they are not pulling out altogether, and they are not blindly slashing their commitments across the board. Instead, they are ranking companies in terms of their overall profitability across every one of the bank's business lines. Those that rank at the top of this list will continue to receive high quality service in all products -- including the ones that don't earn much money for the banks. Those at the bottom of the list will suffer."


In light of these findings, Greenwich Associates urges companies to adopt the same measure used by their banks in evaluating corporate banking relationships: the organizational wallet.


 


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