Uptick in M&As likely in 2014: Credit Suisse

CREDIT Suisse expects an acceleration in mergers and acquisitions (M&As) among corporations globally this year, given that European and American firms are under-leveraged by an estimated US$2.3 trillion, when compared to 20-year average leverage levels.

This fervour should filter into Asia, as the banking and insurance sectors are poised for consolidation, Credit Suisse said in a research report this week. The report indicated that a significant number of Western corporations have "abnormally low net debt"; in the US, the proportion of such companies make up 70 per cent of market cap.

This, however, comes with a caveat - that corporate leverage in America may not be as low as touted when credit-market debt is factored in.

The amount of debt through bonds, after deducting the amount of liquid assets held by corporations, has been on the rise as a proportion of gross domestic product.

That ratio now is not far from its early-2008 all-time high of about 100 per cent, data from Credit Suisse showed.

Still, several companies in the West are in net-cash positions, and the uncertainty behind US economic policy has eased, the report noted.

"We believe that macro uncertainty will continue to edge lower, as the economic recovery in the US strengthens and recent signs from Washington indicate a greater bipartisan spirit in US policy making."

Credit Suisse also noted that the gap between the earnings yield and the corporate bond yield remains above average.

When the earnings yield - taken as the inverse of the price-to-earnings ratio - is high relative to the corporate bond yield, it suggests that stocks are undervalued compared to bonds.

"Hence, M&A is abnormally earnings-enhancing," Credit Suisse said.

In Asia, M&As could be an option for emerging markets such as India, Indonesia and the Philippines, given the attractive demographics and room for growth in credit. Some consolidation should also be expected in the banking sector.

Credit Suisse said: "Hong Kong, on the radar of acquirers, would enable an acquirer to get a foothold in Greater China and to tap the offshore RMB market in Hong Kong. In most markets, there are significant barriers to foreign entrants, but some of them could selectively allow exceptions."

One example is of Mitsubishi UFJ Financial Group buying 75 per cent of Thailand's Bank of Ayudhya last year; the acquiring of a majority holding required an exception granted by Thai regulators on a foreign-ownership cap.

Credit Suisse identified Japanese and Chinese firms as potential acquirers. Cash-flush Japanese corporations have been on the prowl. The cash and deposit holdings of Japan's non-financial firms hit a record high in the first quarter of last year, at 225 trillion yen (S$2.83 trillion).

This is bigger than both the size of Italy's economy, and the liquid assets held by US corporations, Bloomberg reported.