Investors support deals spree, happy to see U.S. companies buy growth

Mon Apr 14, 2014 6:06am EDT
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By Soyoung Kim and Olivia Oran

NEW YORK (Reuters) - After years of responding to shareholder calls for stock buybacks and dividends, major American companies are hearing a different demand from investors: buy growth.

In a low-growth economy in which earnings gains have trailed a run-up in share prices, investors are ready to endorse big deals if that's what it takes to boost revenue and profits.

While stock price gains in the past year have made it tougher to find cheap targets, it also means buying back shares has become much more costly for companies. Using their own expensive stock for deal making may reap companies more benefits than repurchasing shares at what might be the top of the market, some investors say.

About 72 percent of announcements of acquisitions worth $1 billion or more in value in the first quarter were followed by gains in the stock prices of the buyers, up from 60 percent in the previous quarter and compared with a seven-year average of 50 percent, Thomson Reuters data shows.

The trend has emboldened CEOs into striking large deals this year and has contributed to a 52 percent jump in global deal volumes to $756 billion in the first quarter, the best start for

deal making since 2007. While the recent pullback in prices of some of the biggest gainers of 2013 may delay some deals, that is largely seen as a temporary blip.

Buying growth through acquisitions - which often come with job cuts and other cost reductions - may not be entirely good news for a U.S. economy that is desperate for increased capital spending to boost a low growth rate and employment. Many companies are opting to buy an established entity with a proven track record rather than investing in developing their existing businesses at a time when demand from consumers and businesses is still stuttering.

"We've had a long period after the recession where companies were afraid to invest their capital, and money was going into buybacks and dividends," said Lew Piantedosi, portfolio manager at Boston asset management firm Eaton Vance Corp (EV.N: Quote).   Continued...

A screen displays stock charts while a trader works at his post on the floor at the New York Stock Exchange, May 30, 2013. REUTERS/Brendan McDermid