Friday, April 5, 2013

Does the merger dearth mean death for the bull market?

After a spate of merger activity in 2011 and 2012, the value of mergers in the first quarter of 2013 fell precipitously.  Global merger activity in March was about $100 billion according to Bloomberg, on track for the lowest monthly total since July 2009. 

Investors are concerned that U.S. government spending cuts from the recent sequester, along with leadership changes in China and chronic sovereign debt troubles in Europe are to blame.  The feeling is that these factors are “weighing on executive confidence and inhibiting deals,” according to Mark Shafir, co-head of global M&A at Citigroup.

Some investors also worry what the recent dearth of mergers means for the overall health of the bull market for equities.  It’s true that bull markets are historically characterized by healthy levels of merger activity and that diminished M&A levels often correspond with bear markets.  But the relationship is more complex than that.  Corporate cash is still at record levels – more than $4 trillion – which is atypical for a major long-term market top.  The mantra at tops is “cash is trash” and at bottoms “cash is king.” 

Rising stock prices always stimulates merger activity, and as long as equity prices remain near historic highs we can expect to see more M&A activity before long.  Rising share prices also make it easier for companies to pay for takeovers with stock instead of cash, as Steve Baronoff, chairman of global M&A at Bank of America observes.  He further notes that cash-rich private equity firms are on the lookout for $10 billion-plus takeover targets. 

More to the point, bull markets are often engineered to facilitate corporate mergers among key industries.  And this one probably won’t end until we see an explosion of M&S deals of the type that normally accompany exhausted market trends.

Bull markets rarely end on a dearth of merger activity; rather they tend to terminate in a climate of heightened deal making.  The recent downturn in M&A activity is likely therefore a temporary anomaly rather than the start of a new bear market.  

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