Wednesday, September 4, 2013

Within the last 48 hours, Verizon and Microsoft have blown the starter's gun and now it's takeover time in the US. We are likely to see a significant rise in big deals as the cash flush American banks and corporations start to spend their money. And once the trend starts in the US there will be a scramble in Australia, although competition laws will curb the extent of Australian takeovers. In addition, our banks may be more conservative.

Over in the US, banks are back in the risk business, which they exited after the subprime debacle some five years ago. Verizon and Microsoft are providing the signal that the US economy and share markets have been yearning for.

Microsoft has $60 billion in US bonds as directors hoarded cash, not knowing what to do next. Many other US companies did the same thing. Now Microsoft is spending $US8 billion on a high-risk takeover of the Nokia mobile phone business. Microsoft shares understandably fell 4.5 per cent last night as the company, like the US banks, moved back into the risk business.

The various American money printing exercises under the quantitative easing brand have seen US banks and institutions sell their mortgage securities to the government and as a result they now have vast sums available to lend. Some of that money has been used to punt share markets, commodities and dubious emerging country deals. But it was not used for its prime purpose – to fund US corporations and consumers. One reason was that the US corporations were also building up cash. Now some of that emerging country money is returning to the US, making the American banks even more liquid.

Of Verizon's $US130 billion purchase of Vodafone's stake in the US wireless business, 45 per cent was funded by the banks, with a similar amount covered by a Verizon share issue. For banks to stump up with $59 billion to fund a high-risk takeover is a staggering attitude turnaround, especially as Verizon is buying a business which will require further investment. Three months ago the banks would have laughed at such a proposal.
But high risk is an American banking drug and once US bank executives taste the fees and executive bonuses that come from big deals they will thirst for more.

As for Microsoft, one can only imagine why a company with a capitalisation of $US260 billion would want to invest $60 billion in US bonds. Microsoft became like the banks and went into risk averse mode as groups like Apple and Samsung ate their lunch, now Microsoft has broken out and we will see other cashed up US companies follow.

And remember, Australia also has a lot of cashed up companies – particularly in the resources area.

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