Market Wrap-up for Nov. 18 - A Closer Look at the Merger Boom

Market Wrap-up for Nov. 18 – A Closer Look at the Merger Boom


Yesterday, investors learned of yet another mega-merger on Wall Street: the $34.6 billion takeover of oil-services firm Baker Hughes (BHI) by Halliburton Company (HAL). So far, this year’s global merger tally tops $3 trillion, with U.S. M&A activity accounting for $1.5 trillion. According to Dealogic, the current dollar volume of announced deals in the world is higher than in any full year since 2007.

Yesterday, we discussed some of these mega-deals, but today I would like to dive a bit deeper into how exactly we should view this latest merger boom.

A Boom Is a Boom

In general, an increase in merger and acquisition activity is a positive sign for the economy. Companies are actively seeking to create larger, more concentrated, businesses via the synergies resulting from these consolidations. But as we mentioned yesterday, it is important to realize that this latest boom is most likely due to the fact that credit is cheap (thanks to the Fed’s low interest rate policy) and access to capital is easier than in years before.

Furthermore, it has taken a long time for the M&A market to come back after the financial crisis, where activity essentially came to a halt. With momentum on its side, many analysts believe M&A activity will continue to remain elevated, given the current market environment. As stated by Joseph Perella, co-founder of a merger advisory boutique, this latest boom will likely last at least another six to 12 months before other factors come into play.

These factors, which include the Fed’s approaching tightening monetary policy and even the upcoming presidential elections in 2016, will likely curb merger and acquisition activity. While this is not exactly a “bad thing,” investors need to realize that a boom is a boom – meaning that eventually M&A will quiet down a bit, which could be a sign of rougher economic times, the emergence of new businesses, or that companies want to grow more organically.

Looking Past the Boom

What is also important to realize is that this year has seen some incredible merger announcements, some of which may not even be approved by regulatory authorities, given our country’s antitrust laws. If some of these deals do go through, we encourage you to take a close look at these newly merged companies once the M&A buzz dies down. Some important questions to ask should be: Are these merged companies better off? Have synergies allowed these companies to expand and better their businesses? And most importantly, how have shareholders been affected?

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