Good time for American companies to buy into Europe
Kraft’s takeover of Cadbury has generated more than enough heat to melt a chocolate bar but the surprise should be that more US companies are not bidding for British businesses. There may never be a better time for American bidders to pick up cheap UK companies.
The threat of bids from across the Atlantic – with the fear of dreaded American management methods – was a bogeyman of British business for decades, but in reality, the trade has been in the opposite direction. UK companies spent the 1980s and 1990s snapping up US companies – often with disastrous consequences.
Tough US accounting rules forcing the write-off of goodwill made it easier for British businesses to buy American companies than for deals the other way round and Hanson, Saatchi & Saatchi, Marks & Spencer and Sainsbury were among many UK companies that went on a transatlantic spending spree.
By contrast Wal-Mart’s acquisition of Asda and Wall Street’s purchases of Fleming and Smith New Court were rare exceptions of American bids. Most US businesses in Britain – Ford, IMB or Goldman Sachs, for instance – came from Greenfield investment and organic growth.
But Kraft’s bid could set a new trend. All the economic indicators point to this being a good time for American companies to buy into Europe.
The US economy is in dire trouble with a budget deficit of more than 10 per cent of GDP but no political will to close the gap – even less so than in the UK. However, the corporate sector is in good health: while government debt has soared, companies have been repaying borrowings since 2008 at the rate of around $2,000bn every quarter – the first quarterly net repayments for well over a decade.
With the home market in trouble it makes sense for US companies to diversify abroad. And not only are they cash rich, borrowing is cheap and the stock market is high, enabling firms to finance offers.
But as the spending deficit comes to dominate US economics, the dollar seems likely to come under steep pressure. Legal & General’s economist, Tim Drayson, is advising clients there will be a crisis in the dollar and US bond markets.
That provides an instant profit for US firms buying non-dollar assets. Kraft may have worried at the premium it paid for Cadbury but a slide in the currency could quickly turn that into a discount.
The rumour of the week is of US-owned Asda bidding for Home Retail, the UK Argos and Homebase group. Maybe it will be only rumour, but it makes economic sense and it would be odd if American companies were not using this golden combination of circumstances to buy British companies as they emerge from recession. And getting in before protectionist legislation is passed makes political sense for the Americans too.
