There are many signs that this market is getting long in the tooth and a myriad of concerns could trigger a significant selloff over the summer. The two that seem to be going unnoticed by the market are the massive increase in merger and acquisition activity and what is happening in the IPO market. In short, the smart money is heading to the hills. Some would argue that these increases are a result of a robust and brightening economy and the unleashing of animal spirits after a few years of depressed activity due to the economic crisis. I would counter that some of the same arguments were made during the IPO and M&A booms of 1998 and 1999 as well as the private equity heyday of 2007. In both cases, the direct cause of the boom turned out to be more the excess liquidity that was available to go into risky assets.
M&A activity – This has accelerated sharply in 2001. Companies worldwide made $351.6 billion in acquisitions during the first weeks of 2011, an increase of nearly 80% over the same period last year. This trend has continue to get stronger as the year has worn on, punctuated by Microsoft's (MSFT) $8.5 billion acquisition of Skype announced today; which in my opinion will be a long term destroyer of shareholder equity and I am long MSFT. My main concern is these deals that are being done at this point in the cycle are not focused on enhancing shareholder value or to create strategic synergies. They are being done to put excess cash to work and take advantage of very low interest rates. Investment bankers trying to generate fees might be having some impact as well. Historically, rapidly accelerating M&A is usually a precursor to a market top.
IPO's – After being dead for 2008 and 2009, IPO activity picked up significantly in 2010 and the IPO market had its best year since 2007. Global IPO market activity was off to a record start in the first two months of 2011 with $25.3 billion raised in 193 deals worldwide. 26 of these deals were U.S. based and brought in $9 billion. The successful IPO of Renren (RENN) despite accounting questions, no profits, and the fact it is a complete ripoff of Facebook down to the colors; did not bother investors who bid up its shares over 40% in the first half day of trading. Zipcar (ZIP) performed even more robustly with a 60% first day gain despite never netting a penny. Anything to do with social networking has seen spectacular valuation growth over the last year. Facebook is now valued at north of $50 billion, Twitter is valued at $8 billion, and Linkedin (LNKD) is about to go public at a value north of $3 billion. Goldman Sachs (GS) is selling its entire 1% share in that IPO. Does the social networking buzz in 2011 remind anyone of late stages of the internet boom of 2000?
Glencore's IPO reminds me of Blackstone's successful IPO just at the top of the equity market of 2007, and could be a harbinger for the commodities markets. All I know is when the Goldman Sachs and Glencores of the world, the private equity guys, and smart nimble companies are selling out to the public and the corporate behemoths; I would begin to question how firm my footing is on the long side of the market. Be careful out there.