Wall Street dealmakers were off to a busy start in 2013. The first half of the year has seen a lot of corporate America’s most recognizable names get involved in multi-billion-dollar mergers and acquisitions. This year, American Airlines and US Airways announced they would be merging in an $11 billion deal. And, Warren Buffett and private equity firm 3G announced a $28 billion joint acquisition of the food conglomerate HG Heinz.
Not counting any deals after February, US companies spent $219 billion on mergers and acquisitions, according to data from Deallogic. This was a substantial increase from 2012, where firms spent only $85 billion during the same period. It appears that US firms will have their biggest M&A activity this year since 2000.
We know all this activity will benefit shareholders of acquired firms as well as a lot of Wall Street investment bankers – but, what do you think it says about the health of the economy? Mergers and acquisitions have tended to come in waves since the late 19th century. They were driven by the availability of credit, changes in government policy, or the boom of private-sector innovation. For example, deregulation was the motivation for a wave of mergers in the airline industry in the 1970s. It also pushed the consolidation of the banking industry in the 1990s. However, economic conditions, particularly the strength of the stock market are the most important factors in motivating these M&A blooms.
The market has been going pretty well over the last few years, with the S&P 500 up more than 138 percent since its lows of 2009. So, why is the M&A boom only beginning to appear? One of the major reasons is that the market today is reinforced by quantitative easing. The Federal Reserve has taken an unprecedented action, which is keeping interest rates low in both the short and long-term. And, these efforts have Stock prices high despite the weak economy.
The stock market is considered a leading indicator of economic growth, in addition to predicting M&A activity. This means that GDP generally follows bull markets, because stock prices reflect investors expectations for companies future income. A high stock price today represents an investor’s belief in big profits tomorrow. Taken in the aggregate, an increasing stock market index is a predictor of future increases in GDP.
Yet, even though we’ve seen the link between rising stock prices and M&A severed, the huge gains we’ve experienced in stock prices since 2009 have not contributed to a robust economic growth. It’s possible that the Fed action has done more to promote stock price increases than to promote economic fundamentals. However, this is specifically why we should be encouraged by the fast start to M&A activity in 2013, especially since it’s been active in the second quarter. This activity confirms that recent stock market gains are once again reflecting confidence about future profits, and not the central bank stimulus.
This is evidenced by the number of management and boards approving expensive acquisitions. Executive management wouldn’t be looking for acquisitions and boards wouldn’t approve acquisitions if they weren’t confident about future growth.
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