Rampant M&A activity may signal peak of global business cycle

Analysts are concerned at the high levels of debt acquirers are taking on to fund purchases. The latest example is the estimated A$9 billion of debt used to finance the A$11.1 billion takeover of Qantas by Macquarie Bank of Australia and US private equity group Texas Pacific.

This level of debt suggests a complacent and optimistic view of overall macro-economic conditions, while the historic default pattern of bonds point to problems ahead.

The broader M&A issue is a matter of confidence. It takes a company planning M&A a substantial period of time to muster the confidence, resources and shareholder support required to make such a major move. By then it is often late in the business cycle, and not really the moment to buy but managers still decide to seize the opportunity to complete a long-held strategy.

Insider share sales

Whether it is wise from a business perspective to pursue M&A at this time does not come as much into the equation as it should. And interestingly it is exactly the same upper ranking insiders who pursue M&A until the bitter end who also provide the best evidence for showing that the global business cycle is at or close to a peak.

Just look at how insider sales of shares have massively outnumbered insider purchases over the past few months, and a classic pattern of insiders getting out while the going is good is clear. The message for would-be investors is strong enough.

What about the wider message for business in the Gulf region? Well it has to be said that a downturn in the global business cycle would lower demand for hydrocarbons and impact on prices.

In 1998 Opec compounded the impact of falling demand due to the Asian Financial Crisis by increasing production, resulting in oil at under $10-a-barrel. Today there is no sign of a repetition of this unwise policy, quite the reverse, and by supply management Opec should be able to keep oil prices fairly high, unless a global slowdown turns into a slump.

Oil price precendent

Indeed, in the 1970s oil prices remained high despite an economic crisis in major economies and stock market crashes in 1974. History does not necessarily repeat itself exactly but hoping that it will be different this time is probably incorrect.

For a prolonged period of high oil prices has always resulted in an economic downturn in the past, and it may be that such a logical consequence is about to be repeated. It is surely also arguable that the artificially low interest rates of the post dotcom crash period have fuelled an unsustainable boom, and delayed the onset of this painful reality.

But if the late 1970s are any guide then business in the Gulf will continue to be brisk in the closing years of the 2000s, with the many mega projects in the region under construction. And oil prices could continue to be high, albeit with higher global levels of unemployment and inflation.