The Economist - USA (2020-11-28)

The EconomistNovember 28th 2020 Finance & economics 65

2 along. Under Ms Yellen there would be lit-
tle chance of the sort of spat that has devel-
oped over the Fed’s lending schemes (see
next story).
The genius of choosing Ms Yellen lies in
the fact that people of all political persua-
sions can find some reason to cheer her ap-
pointment. That means she will almost
certainly be confirmed by the Senate. Take
monetary policy. Hawks point out that dur-
ing Ms Yellen’s tenure the Fed raised rates
from near zero to 1.25-1.5%. Doves counter
that hawks were over-represented on the
rate-setting panel at the time, and that Ms

Yellen in fact did a good job of keeping

them in check.

It is a similar story on fiscal policy.

Shortly before Donald Trump became pres-

ident, Ms Yellen argued that “fiscal policy

is not obviously needed to provide stimu-

lus to help us get back to full employment”.

She is on the board of the Committee for a

Responsible Federal Budget, an organisa-

tion that spends a lot of time warning peo-

ple about the dangers of high public debt.

Yet in the pandemic Ms Yellen has urged

“extraordinary fiscal support”. In June she

co-signed a letter saying “Congress must

pass another economic recovery package.”

Passing another stimulus bill may be

her first big task. Republicans and Demo-

crats have been unable to agree on a re-

placement to the bill passed in the spring,

with particular disagreement on the size of

the eventual package, even as it is now

clear that America’s economic recovery is

slowing. It is a lot to expect that the sheer

force of one person could help break the

deadlock, not least because Republicans

are likely to retain control of the Senate for

a while yet. But if anyone can do it, it may

be Ms Yellen. 7

Buttonwood Home-schooled

I

magine youare the boss of a public

company. Normally you are busy mak-

ing decisions, visiting outposts, talking

to customers, suppliers and employees.

The meetings are endless. You have little

time for reflection. Then, suddenly this

spring, after a bout of firefighting, the

diary is bare. You sit in your study, hiding

from the family, and ruminate—about

what your firm lacks, about what it has

too much of. You call a friendly invest-

ment banker and say: “I may need to do a

deal soon.”

The results of such stay-at-home

strategy sessions are now apparent. The

past few weeks have seen a burst of m&a

activity. There are merger deals of all

kinds, in all parts of the world, across

many industries—from tech and health

care to banking and publishing. The

dealmakers at investment banks are

joyful. The last time things were this

busy, they say, was in 2007-08.

Shareholders have some call to fear

the worst. There is a weighty body of

literature, some of it dating from the

stockmarket bust of the early 2000s, that

says mergers do not create value for the

acquiring company. More recent re-

search is more nuanced. Mergers over-

seen by serial acquirers tend to add to

value, it finds. Once m&agets going,

things can quickly get out of hand, of

course. But this early in the economic

cycle, and in the unusual circumstances,

mergers are more likely to have a coher-

ent logic to them.

To understand the burgeoning m&a

boom, go back to January and February.

Bankers had a full pipeline of deals. Then

the pandemic took hold. A dealmaking

ceohad to think again. If you had a merg-

er in the works, you pulled it. You

couldn’t project numbers with confi-

dence. You didn’t know if you could

afford a deal, or finance it. Even then, the

calls with bankers never stopped. In place

of black-tie events came virtual schmooz-

ing—from one home study to another.

The deal pipeline started to thaw in

June or July. Announcements have been

coming thick and fast since. A lot of this is

down to market conditions, which quickly

turned favourable and have remained so.

Equity prices have roared back from their

lows of late March. The companies with

shares that rallied first—technology and

health care—found themselves with a

highly valued currency with which to pay

for deals. The corporate-bond market has

reopened with a vengeance, making debt

finance available. Interest rates are at rock

bottom and likely to stay there for a while.

Private-equity firms have a lot of unused

capital (“dry powder”) to call upon.

But financial conditions are not the

only explanation. The economy is another.

The pandemic has given companies new

problems to solve and made some existing

ones more pressing. m&aoffers a fix.

Debt-laden firms need to sell assets. Buy-

ers want to plug some strategic holes. The

rationale for a deal might be to secure

supply chains, to diversify across geog-

raphies, to acquire a specific (often digi-

tal) capability; or simply to bolster rev-

enues or cut costs when the outlook for

profits is rather bleak. Some of the tran-

sactions that are happening now are

deals of opportunity, says Alison Har-

ding-Jones, head of m&ain Europe, the

Middle East and Africa for Citigroup, a

bank. And some are deals of necessity.

Covid-19 has created winners and losers

across industries, but also within them.

ceos of winning companies may find

that the acquisition on their lockdown

wishlist is available. Those of losing

companies must simply try to sell wisely.

Both kinds will be wary of the re-

sponse from shareholders. The risks of

getting the price wrong or of under-

estimating the hassle of integrating

acquisitions are ever-present. But deals

that have a decent-looking strategic case

are likely to be given the benefit of the

doubt. Serial dealmakers will get the

most leeway. Research from McKinsey, a

consultancy, finds that companies that

do lots of smallish acquisitions over time

tend to add value to them. Such “pro-

grammatic acquirers” take more care in

assessing targets, aligning m&awith

broader corporate strategy and integrat-

ing their purchases.

As a rule big, one-off deals are riskier.

The dangers seem small now but will

grow the longer the m&aboom goes on.

Bosses will start to worry that their deal-

making rivals look more in command of

events. They will be prone to the ill-

advised, grandiose merger. When the

boom is all over, a few such souls will

find themselves back in the study at

home, but this time because they no

longer have an office to go to, asking

themselves: “Why did I do it?”

The financial, economic and psychological forces behind the incipient m&aboom