Animal spirits rampant on a field of cheap money. For some analysts, that describes the red-hot deal-making that is going on here. According to Dealogic, the 4,373 deals consummated so far this year have a total value of $821 billion, a 20-year high. So it’s good news: newly confident CEOs, backed by their boards, are bravely borrowing to finance restructurings in several industries. Unless, of course, observers with somewhat different takes on all this activity prove right. As they see it, the deals spurt is a reflection of a weakness in the U.S. economy – the failure of the “top lines” of many companies to grow. Many CEOs are convinced they cannot rely on what is called “organic growth” to keep shareholders happy and, not incidentally, shareholder activists from calling for managements’ scalps.
Much of the recent growth in corporate profits has come from cost-cutting, rather than sales growth. But there comes a time, as one airline executive famously said, that you can cut so much cheese off the pizza that no one will eat it. After years of slimming down, many corporations have cut so much fat that further cost cuts will come at the expense of bone. So, organic growth unlikely, grow by acquisition. Besides, executive salaries are not unaffected by the size of the enterprise atop which the CEO sits, and prestige at the country club is said to grow when gross sales increase.
