August is an unlikely month for an M&A boom

WHEN is a bank holiday not a bank holiday? When you are an M&A banker and your business is picking up again after years in the wilderness.

They started this year with a big tasty takeover in the form of Kraft’s Cadbury bid, but that was an exception and since then the market for takeovers has been quiet. Market uncertainty and fears of a double dip meant lots of companies started to hoard cash again. So what happened to turn a quiet August into an M&A boom?

First things first, just how much M&A have we seen? Of course the big deal on the table right now is Anglo-Australian miner BHP Billiton’s bid for Canadian fertiliser maker PotashCorp, weighing in at $39bn (£25bn). Then there is the proposed tie up between GDF Suez and International Power; Vedanta wants a majority of Cairn India; Korea’s KNOC has its eyes on Dana Petroleum; and Sanofi-Aventis is offering $18.4bn for Genzyme. And those are just the big ones. Of course, this activity has done little to boost the FTSE this month, as investors have been preoccupied with weak US data.

There are lots of reasons for one company to buy another: cut costs, faster growth, diversification, access to new management and the list goes on. Some suggest that companies are simply awash with cash and M&A is the result, but there is still a lot of debt funding being used. Some suggest that the recent surge has been driven simply by cheap money. But does that really stack up? If you believe money is cheap then surely it has been cheap for a while. The Bank of England base rate has been 0.5 per cent since March 2009. If you believe that base rates are no reliable indicator of the cost of debt to corporates then you argue that the credit environment remains tight and that has not suddenly changed in August. Certainly management will be weighing up whether it is cheaper to buy or to build new business, but to say money is cheap is too simplistic.

So perhaps we should look at August’s M&A mini-boom as a bullish signal. The logic being that if companies feel confident enough to do big deals then their underlying businesses must be doing ok. But even BHP Billiton is cautious about the short-term outlook for the global economy.

Whatever the reasons behind this month’s uptick in takeover activity, the private equity players who were so key to the 2005-7 boom are a shadow of their former selves. But don’t write them off entirely. CVC Capital Partners is in the process of doing a number of deals worth more than a billion dollars in the infrastructure and food and drink markets and Onex Partners are trying to buy auto-parts supplier Tomkins. An M&A boom in August, these are strange times indeed.

Anna Edwards co-anchors Capital Connection and Squawk Box Europe weekdays on CNBC.