Corporate Finance: It's Finally Time to Spend

AN ANALYSIS CONDUCTED BY STEFANO GATTI AND CARLO CHIARELLA OF CAREFIN BOCCONI IN COOPERATION WITH GOLDMAN SACHS HIGHLIGHTS GOOD PROSPECTS FOR INVESTMENTS AS WELL AS MERGER AND ACQUISITION DEALS

In the first half of 2014 corporate investments and M&A deals in Europe picked up pace again. According to an analysis conducted by Stefano Gatti and Carlo Chiarella (Bocconi’s Centre for Applied Research in Finance – CAREFIN) in cooperation with Goldman Sachs, such a recovery marks a turning point, because the macroeconomic conditions that during the crisis drove companies to raise cash holdings by 30% and reduce leverage by one tenth are fading out. European companies sit on a €500 billion cash pile, American corporations on $1.4 billion and now it’s time to make this money yield. Corporate bonds issuance in the American market, more responsive than the European market, is back to pre-crisis levels.

The analysis, for the period 2004-2013, of the balance sheets of 437 European non financial corporations included in the Stoxx Europe 600 ex-financials Index shows that companies, during the crisis, moved along three lines: debt repayment, earnings retention (the two leading to deleverage) and disintermediation, i.e. the issuance of bonds in order to replace harder to obtain bank loans. Paired with investments delay and cost cuts, such behavior led to strong cautionary cash hoarding.

"Today, concerns about financial solidity are subsiding and corporations have to decide how to use their cash, choosing whether to return it to shareholders or invest it for organic growth or M&A deals. The second option is posed to gain momentum as macroeconomic uncertainties fade out", Massimo Della Ragione, Goldman Sachs co-head Italy, said.

Shareholders reimbursement, the authors write, has been the prevailing strategy up to now because it implies predictable results and is suitable to markets where alternative investment opportunities are scarce. The outcome of corporate investments is, on the contrary, always unpredictable and they are consequently unsuitable to periods of macroeconomic uncertainty. The recent reduction in uncertainty will likely give a boost to this kind of use of cash.

The main source of concern singled out by the authors is the schedule of debt refinancing. From now up to 2018 €1.3 trillion of debt instruments issued at favorable market conditions are expected to mature, with a peak of €300 billion in 2014.

by Fabio Todesco