IS RECENT MERGER MANIA A BAD SIGN?
Wall Street’s latest deal craze similar to those before dot. com bust, recession and may signal looming top
This week was kicked off by another “Merger Monday” and that might be bad a sign for stocks.
Among the day’s deals: General Electric is combining its oilandgas business with oil services firmB aker Hughes, amove that will create an energy powerhouse with $ 32 billion in annual revenue. CenturyLink and Level 3 said they’re joining forces in a $ 25 billion marriage in the communications space.
In October, U. S. merger- andacquisition deals have totaled $ 330.3 billion, the second- best monthly total on record, trailing only July 2015’ s $ 332.3 billion,
“The flurry of cash mergers is a cautionary long- term signal for U. S. stocks.” David Santschi, CEO of Trim Tabs
according to Dealogic. The biggie was the more than the $ 85 billion AT& T agreed to fork over a week ago to acquire media content giant Time Warner, which has HBO, CNN and TV hit
Game of Thrones in its stable. The latest urge- to- merge frenzy follows a record amount of M& A in 2015, when global deals totaled $ 4.7 trillion for the first time, topping the previous $ 4.6 trillion record set in 2007, Dealogic says.
October’s frenzied deal activity has caught the eye of analysts who note that similar bursts of corporate M& A activity in 1999- 2000 and 2006- 2007 occurred near stock market tops.
Driving the latest deal- making: CEOs trying to offset slowing profit and sales growth by growing by acquisition, ample cash reserves, still- low borrowing costs which enable companies to fund deals cheaply, and an ongoing push to stay competitive in a financial world driven by consolidation, says Brad McMillan, chief investment officer at Commonwealth Financial Network.
The robust M& A activity is sending up a yellow flag, as the past two times deal activity has spiked in a cluster of back- to- back years was in the run- up to the 2000 dot- com stock crash and 2008 financial crisis.
Through Oct. 30, U. S. companies committed $ 105 billion in cash for October takeovers ( that doesn’t count stock used to buy companies), topping the previous monthly record cash outlay of $ 97.5 billion in October 2015, according to TrimTabs Investment Research.
“The flurry of cash mergers is a cautionary long- term signal for U. S. stocks,” David Santschi, CEO of TrimTabs says. “Cash merger activity has a tendency to peak around market tops.“
Still, a spate of M& A deals in a short time frame isn’t an accurate shortterm market- timing tool, Santschi adds.
McMillan’s analysis of how stocks reacted to periods with bursts of merger activity found there was a lag of 15 months or more between each of the 10 biggest in history and a significant market downturn. What normally occurs, he says, is an initial megamerger kicking off a cluster of other mergers over a multiyear period that gives stocks a lift early but leads to an elevated market.
If AT& T- Time Warner marks the megadeal in the currentmerger frenzy, as McMillan suggests, it means “the risky period is starting now, that there’s elevated risk but not immediate risk,” he says, adding that other signs of a bear market, such as a recession or aggressive rate- hike regime from the Federal Reserve, aren’t present.