It seems these last few months have been marked by a serious spike in M&A activity. There have certainly been a lot of high-profile deals here in the U.S. So far this week we have seen Roche buy InterMune (ITMN), Burger King (BKW)’s purchase of Tim Hortons (THI), and Amazon (AMZN) buying Twitch. Without even looking, I can name a few more from recent weeks and months; the Jos. A. Bank and Men’s Wearhouse (MW) saga, the dollar store wars and Google (GOOG)’s purchase of Oculus spring to mind. This rash of deals, or rather the publicity surrounding them, has, somewhat inevitably, been taken by the perma-bears as a sign of impending collapse.
M&A spikes, the reasoning goes, usually presage a big drop in the market and we are spiking, therefore a big drop is coming. That all sounds logical, but it rests on one false assumption…that M&A deals are spiking. Yes, there have, as I said, been a lot of high-profile deals in the U.S., but when total global deals are looked at you can see that we are still a good few years from the trouble zone.
This chart comes from the Institute of Mergers Acquisitions and Alliances’ website and chronicles the number of deals around the world on an annual basis. The first thing to be said is that you should ignore the second bar from the right, which represents deals in the half year to the end of this June. It should also be pointed out that, given the rush of deals here in the world’s largest market over the last two months, the 2014 estimate that makes up the last bar could well be raised somewhat. Even so, given that the last two “spikes”, in 2000 and 2007 took fifteen and five years respectively to form, even if the total does come in above last year’s, logic would tell us that that indicates not an imminent collapse, but at least five years of sustained growth in equity markets.
If hard evidence isn’t enough, and your feelings still tell you that we are spiking, then even that doesn’t necessarily mean that we are doomed. It is easy to look at the above chart and conclude that, because the number of deals dropped off sharply in 2000 and 2008, a lot of M&A deals signal a collapse in the market, but this is twisting the evidence to support a conclusion. It would seem far more likely that the opposite causation is true; when markets collapse, M&A deals go down. Those drops during tough times, though, may interrupt, but don’t end, the upward trend.
It is not that the rash of acquisitions doesn’t worry me; it is just that I don’t believe there is any statistical evidence that it presages a collapse. These deals seem to be driven by two factors. The first is the benefit of “inversion” which has been well-publicized. The antiquated corporate tax structure in the U.S. makes it beneficial for companies to buy an overseas entity and then move operations to that country. I am not a tax lawyer, nor do I play one on T.V. so I don’t understand the full ramifications of this, but the economic effect would seem to be limited. These companies will still have operations here in the U.S. and the amount of tax lost is miniscule in the grand scheme of things.
The second driver of deals, though, is a little more worrying. Companies have a lot of cash lying about and access to cheap credit. The fact that so many believe that the best way to benefit from that set of circumstances is to acquire, rather than expand operations, is a little worrying. That doesn’t create jobs, except maybe in Wall Street M&A departments. In many cases, “efficiencies” and “Synergies” are actually synonyms for job cuts, and although the situation is improving, long term unemployment in particular is still a major drag on the economy. That may mean that, at least here in the U.S., the recovery cannot pick up pace and remains a slow grind, but that is not the same as a collapse.
The evidence shows that in global terms, which is what matters, M&A deals may be arresting the decline of the last few years and beginning to edge back up, but, like most statistical evidence, the possible effect of that is open to interpretation. Those that say it is a harbinger of doom are entitled to their opinion, but history tells us that it is more likely to indicate a few more years of strength in equities.