Asian stocks could lead M&A charge after Sprint deal

<p>It’s been a quiet year for merger and acquisition activity. Despite the US equity market rally, the volume of corporate activity is still very low […]</p>

It’s been a quiet year for merger and acquisition activity. Despite the US equity market rally, the volume of corporate activity is still very low compared to pre-crisis levels. This comes despite record low bond yields and a reasonable improvement in corporate profits over the past 12 months.

Total M&A activity (as measured by Bloomberg) dipped to around US$413 billion in the third quarter of 2012 compared to US$662 billion in the fourth quarter of 2010. If we go back to the frenzy leading up to the global crisis, M&A activity hit around US$1.3 trillion in the second quarter of 2007 so we are currently at around a third of those levels, despite the Dow Jones Industrial Average trading only 4% below its high in the second quarter of 2007.

With that in mind, today’s news that Japan’s Softbank Corp is looking to acquire 70% of Sprint Nextel for about US$20bn is not all that surprising. Japan’s record-high post war currency appreciation and record low government bond yields are fuelling corporations to look abroad for growth opportunities. The deal could be one of the largest ever overseas acquisitions by a Japanese firm over the past decade. In fact one of the largest deals this year has also come from the Asian region – China National Offshore Oil Corporate (CNOOC) pitch for Nexen in July worth around US$17.4bn.  This ranks second only to Glencore’s merger with Xstrata worth around US$46.7bn, but is a stock only deal unlike CNOOC’s cash pitch for Nexen.

The Softbank/Sprint deal is probably the first in a whole stream of M&A activity from Asian companies. In Australia, even the struggling steel manufacturing industry has attracted interest from Asian firms looking to reinvest abroad. South Australian steel manufacturer Arrium knocked back a $1bn offer from a consortium led by Noble Group among South Korean investors. It followed BlueScope Steel’s deal with Japanese heavyweight Nippon Steel.

Softbank’s motivation to pursue Sprint is not only about short term returns – it provides the comparative newcomer in the Japanese telco market an opportunity to emerge into one of the world’s largest telecom groups, if successful managing around 90 million subscribers. It also provides Sprint with an immediate cash boost of around $8bn which will allow it to roll out its 4G wireless network, pay down some debt and potentially make new acquisitions.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.