It’s seemingly been a busy year for mergers and acquisitions, with Carl Icahn aiming to acquire Dell (DELL), DISH Network (DISH) and Softbank (SFTBF) gunning for Sprint (S) as well as Clearwire (CLWR), AstraZeneca’s (AZN) purchase of Pearl, Google (GOOG) scooping up Waze, and most recently, Dole Food (DOLE) CEO David Murdock offering to take the company private.
And that’s just a sample of all the deals made in the United States in 2013. All told, as of the end of May, a total of 2,750 mergers or acquisitions have transpired in the U.S. this year. That’s a big number, but what’s interesting is that the year-to-date number of deals for 2013 actually trails the 3,242 reached by this time in 2012.
On the other hand, the deals are getting much bigger. Since the beginning of the year, $290 billion worth of M&A activity has materialized, leaving 2012’s to-date figure of $218 billion in the dust. Nine of 2013’s deals so far have been bigger than $5 billion, versus only five deals of that size by this point in time last year.
Even with fewer deals unfurling this year, though, mergers and acquisitions are still going strong in the grand scheme of things, and making enough people enough money to inspire more of them.
What’s it all mean, and what should investors do about it?
Good or Bad? That Depends.
There are two opposing schools of thoughts when it comes to interpreting what M&A mania really means.
The bullish argument: Few would argue that the past year hasn’t been a normal one in terms of the synchronization of the equity market and the economy. Corporate profits reached record levels last quarter, and the market is 24% higher than it was a year ago. Yet unemployment (real unemployment) remains frustratingly high, and any rising tide of economic growth hasn’t actually lifted the average consumer’s boat … even the employed consumers.
How can an economy grow like that and continue to take the market to record earnings? Some pros explain it by saying the market’s current action is predictive of future economic growth. That certainly has been true in the past, and even though the economy is taking awhile to get going in earnest, experts say the market is never wrong — that economic boom is still coming.
What’s that got to do with all this acquisition activity? If CEOs and boards weren’t confident about real growth (not just the bookkeeping growth often achieved by M&A) in the future, they wouldn’t be so keen on paying premiums — an average of 34% for the year so far — to expand their companies.
The bearish argument: The fact so many companies are being acquired by … well, other companies, might simply indicate that CEOs and boards have given up on organic growth, and in an effort to maintain the appearance of creating shareholder value have been forced to merge or buy, then eliminate any redundancies they can to grow the bottom line.
Or, with interest rates being at rock-bottom, multi-decade-low levels, it would be asinine to not utilize all that cheap money to do something. Debt-financed buyouts are just the most practical use of the cheap money opportunity. There’s not a lot of real value being built by them, however.
So which of these two arguments is the one investors need to adopt now?
Truth be told, maybe a little of both. The bullish argument presently holds more water, but (and as usual), there’s more to the story.
If nothing else, the merger and acquisition buzz has helped to keep investors interested in certain stocks. In some cases, a buyout has been the only reason people have remained interested in the market at all. A sound philosophy? Not really, but if it works, it works.
The thing is, mergers and buyouts are poised to dominate the headlines well into the latter part of this year, and into 2014 too. As long as that’s the case, the market’s going to have something to stir the pot in a bullish way. Perhaps a few more quarters of growth in the equity market, and merger mania will finally start to fuel the real economic growth that doesn’t exist right now.
Before any and all investors across the globe step up to the plate, however, there’s an interesting detail to digest: While the United States’ M&A market has been on a roll, the global aggregate value of deals is actually down about 19% compared to the total at this time of the year for 2012.
Point being, if you really need buyouts and mergers to fuel your growth, your best bet is with U.S.-based stocks.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.