Investor Sentiment towards M&A

The Sunday Telegraph reported mounting pressure for mining companies to return cash to share holders through increased dividends or stock repurchases. Pressure is most intense on companies involved in high profile M&A activity over the past year. We look at investor sentiment in these stocks as well as the specialist advisors involved. Stocks covered are; BHP Billiton (LON:BLT), Rio Tinto (LON:RIO), Greenhill and Co Inc (NYSE:GHL), Evercore Partners Inc (NYSE:EVR), Aegis Group Plc (LON:AGS) and Sanofi-Aventis Sa (EPA:SAN).

Despite the disapproval of institutional investors, BHP Billiton and Rio Tinto show low short interest and institutional ownership has remained relatively flat over the year with an increase of less than 1 million shares.

Independent investment bank Greenhill and Co derives 90% of revenue from M&A advisory. The company posted disappointing fourth-quarter earnings last week and short interest has doubled to 15.3% of total shares outstanding on loan since June. Holdings of long only funds who lend, which can be used as a proxy for institutional ownership, have increased from 7 to 9 million shares, which accounts for almost 30% of the total shares outstanding.

The takeover of Mitchell Communication by Aegis Group, which was advised by Greenhill, has been well received by investors. Short interest is at its lowest level in two years at 3% of total shares, whilst institutional ownership has increased since November by 50 million to 270 million shares. The marketing company continued to payout a solid dividend throughout the financial crisis.

Evercore Partners is another US listed M&A advisor due to report earnings on Wednesday. Investor sentiment in this stock is more positive than in Greenhill. Although institutional ownership has increased over the past year by almost 20% to 4.9 million shares, short covering since late September has decreased from 11% to 4.7% of total shares outstanding on loan.

Evercore continues to advise the possible takeover of Genzyme by Sanofi-Aventis in the Pharmaceuticals sector. Interestingly, Sanofi-Aventis has seen little movement in short interest since the deal was announced last year with the percentage of total shares outstanding on loan remaining flat at 2%.

Although, the CEO of Sanofi-Aventis has said he plans to remain disciplined and not to overpay for acquisitions, could this rumoured $18.5bn mega deal impact dividend or share buy-back prospects? Of course, it is the M&A departments of the large investment banks that are driving most M&A activity and are likely to bear the brunt of a possible flight to cash from investors.

Users of the Bloomberg terminal can download the attached document which shows how to conduct analysis on one of the stocks list above