Last week David Rosenberg pointed out that mega Merger Manias like the one we are experiencing “invariably takes place at or near cycle peaks, as companies realize that they can no longer grow their earnings organically. We have just witnessed five multi-billion dollar deals this past week alone — $207 billion globally (AT&T/Time Warner; TD Ameritrade/Scottrade) in what has been the most active announcement list since 1999 … what do you know, near the tail end of that tech bull market too.”
And now that October is officially over, we can close the books on what has been an unprecedented month for M&A. According to Bloomberg, in the month when a chill was sent through the spines of corporate CFOs and their investment bankers over fears that rates are about to rise and thus make debt-funded deals more expensive, the scramble to acquire competitors went off the charts, leading to an all time high in global M&A with almost half a trillion dollars of mergers and acquisitions announced globally.
CenturyLink Inc.’s $34 billion acquisition of Level 3 Communications Inc., as well as General Electric Co.’s deal to combine its oil and gas division with Baker Hughes Inc., pushed October’s deal volumes to about $489 billion, according to data compiled by Bloomberg. That’s the highest amount for at least 12 years, topping the previous record of $471 billion in April 2007, the data show.
Deallogic had a slightly different higher October deal total, calculating that the value for mergers and acquisitions for October actually surpassed the half a trillion mark, hitting $500.1B, but the idea is the same and adds that global deal volume has only been higher during five other months in records going back to 1995. More than half of the deals have been based in the US, where M&A volume has already hit a monthly record of $321.2 billion. That’s about a third higher than the next biggest month on record, according to Dealogic.
Cited by Bloomberg TV, Bob Profusek, partner and chair of the global M&A practice at law firm Jones Day said that “every weekend recently has been busy.”
According to the Jones Day lawyer “the fundamental drivers are still there,” Profusek said. “Low growth — which is bad for most things, but it’s good for M&A because that’s how you get growth — and very accommodating capital markets.” More important, however, are concerns that the period of low interest rates is coming to an end, prompting corporations to scramble and issue debt now while it is still cheap.
Profusek worked for Potash Corp. on its merger with Agrium Inc., and is advising Reynolds American Inc. on British American Tobacco Plc’s $47 billion bid for the rest of the company.
The mega deals dominated October, with just eight transactions accounting for more than $300 billion of the October total. The biggest deal of the year, AT&T Inc.’s $85.4 billion bid for Time Warner Inc., was revealed on Oct. 22 in a rare Saturday deal announcement. So far this year, 32 deals valued at more than $10 billion have been struck. That puts 2016 on track to beat every year since 2007 except for last year, when a bumper 52 transactions of that size or more were announced.
“Size matters,” said Profusek, “particularly because we’re in a very challenging regulatory environment right now.”
The massive size of M&A also means that the market is skeptical many of them will close, or will ultimately find financing should rates spike higher prior to closing. Almost 30 deals announced since the start of 2015 have not yet closed, including Dow Chemical Co.’s $59 billion merger with DuPont Co., which was pushed back until next year. The two health insurance megadeals – Anthem Inc.’s bid for Cigna Corp. and Aetna Inc.’s offer for Humana Inc. – are also still pending. Both those deals are currently trading with at least $40 gaps between the offer price and the target’s current share price, indicating investors are pessimistic they will close.
As Bloomberh observes, “despite currency and equity markets reacting skittishly to poll results and news sentiment in the final days before the U.S. presidential election, M&A activity is forging ahead.”
“I don’t hear boards or management really putting the election high on their list of concerns,” Frank Aquila, partner at law firm Sullivan & Cromwell LLP, said in a telephone interview. “Unless there is some sort of regulatory deadline or tax deadline that people are working to, deals get there when they get there.”
And yet, according to companies, the biggest reason why consumer spending is weak and deteriorating is precisely due to the election. Almost as if someone is lying…