What to watch

Merger, acquisition activity remains healthy

Mergers and acquisitions are perking up. But don’t pop the champagne just yet. It’s more of a worry for investors than a reason to celebrate.

U. S. merger and acquisition activity hit $ 977 billion this year so far, says Richard Peterson, senior director of S& P Global Market Intelligence. While deals are running below the $ 2.06 trillion level of 2015, nearly breaking past $ 1 trillion marks a healthy environment. Some big companies are involved, too, with the largest buyers of U. S. firms by transaction size being Bayer, Abbott Laboratories and Shire.

Companies tout the massive synergies from these deals. Investors, though, need to be skeptical, according to an analysis co- authored by Richard Tortoriello, researcher at S& P Global. Companies that made big deals — valued at 5% or greater of their value— wound up underperforming their peers in subsequent years, specifically in terms of profitability, earnings growth and return on capital.

Deals paid for by companies using their own stock perform even worse than those paid for with cash. Evenmore alarming is companies that grow quickly prior to making a big acquisition see their performance flag dramatically three years after it closes. Too much cash can be a bad thing, seemingly as the riches burn a hole in companies’ pockets and lead to bad deals. Cash- rich acquirers also underperform after deals.