Matthew Lynn: Potential merger boom sure to spark public backlash

Opinion

Wondering what the next bubble might be? How about a merger boom?

All the signs are that the global capital markets are gearing up for the next big thing: a wave of mergers and takeover bids.

Kraft Foods is stalking UK confectionery maker Cadbury; mining company Xstrata has proposed combining with Anglo American; and computer manufacturer Dell just acquired Perot Systems.

Expect more deals to be announced over the next six months.

That will be great for bankers and hedge-fund managers. The investment banks will rake in millions of dollars in advisory fees, while the hedge funds can mint themselves a fortune from buying and selling the shares in targeted companies. The image of the financial markets will ultimately suffer.

The last thing they need is another bubble. And the sight of financiers making fortunes while ordinary people lose their jobs will stoke a populist backlash that is already brewing.

"M&A now looks ready to make a comeback," Credit Suisse Group said in a note to investors last month.

There are good reasons to agree with that statement.

First, in a tough economic climate, mergers are one of the few ways to boost profits. You can buy a company, rationalise it, strip out costs, and fire staff.

If you can reduce competition in the market as well, you may even be able to raise prices a bit. It is hard work, but it is easier than conquering new markets or launching new products in a global economy where most consumers are strapped for cash.

For the next few years, it may be the best way for chief executives to keep earnings moving ahead so they can justify their bonus.

Next, there are quite a few once-in-a-lifetime opportunities out there. If you have had an eye on a large, strategic deal for years, but always baulked at the cost, this is the moment to strike. If you aren't planning to make that transformational deal now, while the stock markets are still a long way off their peak, then you probably won't ever do it. Either you seize the opportunity this year, or kiss it goodbye.

Lastly, financing is cheap. True, there isn't a lot of spare capital around, and there probably isn't much point in asking your bankers to help out with a few billion.

But if your balance sheet is in reasonable shape, and you can access the bond markets for money, then you can finance that big deal on the cheap with interest rates at record lows.

As long as the targeted company is profitable, you can finance the purchase from the cash flow and even make a profit since the cost of the capital is so low. In effect, you can buy the company for free, and that will be hard to resist.

Bankers can peddle any of those pitches and count on finding a receptive audience.

And yet, what people in the markets should be figuring out is how to stop bubbles inflating - not how to start another one.

Stoking investment frenzies, generating huge fees for bankers, and not worrying about the long-term consequences? Isn't that the type of behaviour the financial markets are meant to be trying to stop?

We may well see a merger boom. But if it happens, only one conclusion can be drawn: We have learned nothing from the crisis of the past year.

- BLOOMBERG