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Corner a banker at a cocktail party to explain the current boom in mergers and acquisitions and he or she will point to soaring stock prices, low interest rates for debt financing and the return of animal spirits in boardrooms.

But ask a shareholder and they will take a far more sceptical view.

After the financial crisis, so this counter-narrative goes, companies suspended payouts to investors and looked inward to aggressively cut costs. Even as balance sheets improved, executives remained timid and turned to share repurchases and dividends to keep shareholders at bay.

Jumbo M&A deals

Now with shareholders increasingly sceptical of the record levels of capital returns, companies are taking advantage of market conditions to take financial engineering to the next level — by buying their rivals.

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Vadim Zlotnikov, chief investment strategist at AllianceBernstein, which manages $474bn in assets, is among those prescribing to this reasoning to explain the dealmaking euphoria.

“The significant increase in corporate leverage and lending is not being used in the pursuit of organic growth but is instead being used for financial engineering,” he says.
A number of data points seem to support that argument.

US companies are expected to return a record $1tn to investors in the form of buybacks and dividends, up $904bn on last year, according to S&P Dow Jones Indices.
Meanwhile, capital spending, or the investment a company makes in its future capacity, remains constrained relative to sales and has barely ticked higher in recent years, according to US company data compiled by Morgan Stanley.

And sales growth remains sluggish for companies based in the US and Europe, despite the benefits of the lower oil price on consumers.
Companies on the S&P 500 index are projected to report negative revenue growth for both the first and second quarters of this year, according to S&P Capital IQ, the data provider.

Nick Lawson, head of event driven strategies at Deutsche Bank, says the fear in corporate boardrooms has shifted from concerns over a company’s cost base to its strategy and outlook.

“Following the crisis, revenue was a swear word and now M&A masks a multitude of sins. There’s a real lack of capital expenditure ambition and it was first hidden by the idea of buybacks and now by M&A,” he says.

Jumbo M&A deals

That could help explain why mergers and acquisitions activity is off to its fastest start since 2007, with deal volumes nearing $1.3tn in the first four months of the year, according to Dealogic.

In particular, the gains have been driven by a surge of “jumbo” deals, mergers that are greater than $5bn in value, which account for 43 per cent of all activity — the highest proportion since 1999.

William Vereker, head of Europe, Middle East and Africa investment banking at UBS, says: “In an environment where costs have already been reduced and companies are struggling to find growth, M&A is a way to drive greater revenues. Boards and executives are increasingly confident and shareholders have been supportive.”

That has investors such as Mr Zlotnikov questioning what is going on since profit margins in almost every region are at record levels but revenues remain weak.
“Corporations have improved the efficiency with which they run. Still, it strikes me that a fair number of these deals are done to squeeze down overheads and cut investments. It is really done for reasons of cost, rather than some brilliant vision of growth synergies,” he says.

Indeed, a feature of several of this year’s largest deals are huge cost cutting targets.

For example, Royal Dutch Shell said it plans to reach cost savings of $2.5bn in 2018 from its takeover of rival oil and gas producer BG Group for $82bn including debt.
Nokia, the Finnish networking equipment maker, said it would reduce €900m in costs by 2019 through its $15.9bn acquisition of France’s Alcatel-Lucent.

Even Warren Buffett, the world’s most famous value investor, was forced to defend his relationship with Brazilian private equity group 3G at Berkshire Hathaway’s annual meeting last weekend, following their latest deal together.

In that transaction, Heinz, the US condiments group controlled by Berkshire Hathaway, and 3G acquired US foods group Kraft to create a company with a value of more than $100bn including debt.

Mr Buffett and 3G said they would target cost savings of $1.5bn by the end of 2017, prompting one longtime Berkshire shareholder to tell Mr Buffett that 3G’s aggressive cost cutting gave him “heartburn”.

In an environment where costs have already been reduced and companies are struggling to find growth, M&A is a way to drive greater revenues
- William Vereker, UBS

Still, there are few signs that M&A activity will slow anytime soon especially in sectors such as pharmaceuticals and consumer goods where deals have been rampant.
“There is pent-up need for consolidation in a number of sectors, on the back of a prolonged period of uncertainty,” says FX de Mallmann, global co-head of consumer retail and healthcare at Goldman Sachs.

But even as M&A activity ticks higher, some will be