Tide turns on buybacks and mergers
Share buybacks are on the wane. In the US, September was the weakest month for buybacks in almost four years, with around $3.7bn worth announced as US companies, some of whom funded buybacks with low-interest loans, pulled in their horns because of the credit crunch. A slide in buybacks would undermine earnings per share, notes Francesco Guerrera in the FT. Buybacks were expected to account for a fifth of the S&P 500’s earnings this year.
Another crucial prop to equities over the past few years is also being broken by the credit crunch. The global mergers and acquisitions (M&A) market has tumbled, with the volume of deals down 42% in the third quarter to $1trn. Activity in August and September was 73% below July’s level. The private-equity boom – buyouts comprised about 35% of the M&A market over the past 18 months – has been “strangled in a matter of weeks” by the credit crisis, says The Economist. By mid-September, global buy-out volumes had reached around $20bn, compared with $160bn in May, when investors were looking forward to the first $100bn deal.
Banks are still sitting on hundreds of billions of dollars of buy-out loans that they can’t sell on, crimping their ability to fund new deals. One Wall Street boss told The Economist that he can’t imagine a buyout over $10bn until well into next year. Firms rattled by the credit squeeze have not stepped into the gap left by private equity, notes Lina Saigol in the FT, and if economies slide into recession, next year’s expected M&A recovery will be derailed
