Corporate executives, like almost everyone else, like to buy at the top. They are buying heavily now. Not their own stock, but that of other companies in mergers. From Wolf Richter at wolfstreet.com:
Something weird is going on – that’s all everyone knows.
October was merger-mania month with a pre-election surge during the waning days: five of the largest 11 US-focused Mergers & Acquisitions in 2016 were announced in the last 10 days of October, including two that broke all-time industry records.
The mania was topped off by two big announcements on Monday:
• GE’s $25-billion acquisition of Baker Hughes. Since 2008, the M&A-meister, financial engineering specialist, and industrial powerhouse has gobbled up 51 companies of $1 billion or more in value.
• CenturyLink’s $24-billion acquisition of Level 3 Communications.
In the prior days, three big deals made investment bankers salivate:
• AT&T’s $85.7-billion deal to acquire Time Warner, announced on October 22, the hugest deal in the history of media, even huger than the prior hugest media deal ever, the AOL Time Warner deal that ended as a spectacular success [failure] along with the rest of the mania at the time. But Wall Street instantly refuted what everyone had been thinking from the very first moment, that this was most decidedly and in fact, doubtlessly, not the next AOL Time Warner.
• Qualcomm’s $39.2-billion acquisition of NXP Semiconductors, announced October 27, the biggest deal in the history of the semiconductor industry.
• British American Tobacco’s $46.9-billion acquisition of Reynolds American – the 57.8% it didn’t already own – announced on October 21.
This pushed US deal volume in October to $330.3 billion, the second highest month on record, after July’s $332.3 billion! And this comes after the all-time record year 2015.
It pushed global deal volume in October to $502 billion, according to the Financial Times, and to $489 billion, according to Bloomberg, which pointed out that October was the busiest month in 12 years (Bloomberg chart via Christine Hughes, OtterWood Capital):
This sort of deal making where billions simply don’t matter is eerily reminiscent of the last-minute frenzies in 1999-2000 and 2007, before it all came unglued. Everyone knows that after a record-breaking M&A boom, stock markets tank. The only thing no one knows is when this will happen, when the M&A frenzy will go into its final paroxysm and collapse.
Everyone is trying to come up with their own theories to predict this event and put a timeline on it. One thing is a given: Never in history has there been that much central bank manipulation; never have there been $12 trillion in bonds that traded with a negative yield; never have central banks printed so much money. It’s a new era, and none of the old models will work. Something new and unexpected will be taking place instead.
But the red flags keep cropping up. According to TrimTabs Investment Research, cited by USA Today, US companies committed $105 billion in cash (in addition to stock) to pay for these takeovers in October, beating the prior all-time monthly record of $97.5 billion set in October last year:
“The flurry of cash mergers is a cautionary long-term signal for US stocks,” TrimTabs CEO David Santschi told USA Today. “Cash merger activity has a tendency to peak around market tops.”
To continue reading: Is Merger-Mania-October the Classic Paroxysm before it All Comes Unglued?
