What happens in the U.S. financial system doesn’t stay there.
Tough financial conditions tend to rollover into the global economy and disrupt Wall Street’s mergers and acquisitions dealmaking machine, new research shows. And it could likely hit the big investment banks hard.
“We find that financial conditions in the core have significant spillover effects on cross-border M&As,” states the report titled “Cross-Border Spillovers: HOW U.S. Financial Conditions Affect M&As Around the World.” The paper was written by Katharina Bergant and Prachi Mishra at the International Monetary Fund, plus Raghuram Rajan at the University of Chicago Booth School of Business. And it ws distributed by the National Bureau of Economic Resarch
The researchers found the that a 1 percentage pint rise in the U.S. Financial Conditions index, which indicates its harder to get financing, leads to a decrease in value of approximately 10% for M&A deals.
However, there is some good news in this mix. While deals are priced lower when financial conditions are tighter, there is a greater likelihood that the merger or acquisition will make money for the shareholders.
The authors state the matter like so:
- “Acquisitions that happen around tighter financial conditions globally create greater value; while those that coincide with loose financial conditions presage weaker performance.”
That fits with a long understood phenomenon: Many deals fail to add value in any way as shown in Bob Bruner’s book “Deals from Hell.”
So while Wall Street’s bankers — who get paid in relation to the deal fees — may suffer from tighter financial conditions, stock market investors may do substantially better.
Overall, U.S. financial conditions have tightened since the beginning of the year, although some of that move has been unwound in the last few weeks, according to the Chicago Fed, according to its National Financial Conditions Index. In other words, conditions are tighter.
In turn that should be good for investors.