M&A Bubble: Not If, Not When, But How It Breaks

by: Roger Nusbaum

roger nusbaumRoger Nusbaum submits: A very useful question about M&A came in: There are a couple of schools-of-thought as to whether increased M&A activity is bullish or bearish.

History probably supports both notions.

The other night I was a last-minute fill-in on Capital Connection and was asked whether the Dow Jones deal marks a top or not. I said not yet, because there are still a lot of funds being started that have yet to be deployed, but that a year from now it could be a tipping point to a problem -- and on second thought maybe a little sooner. Before I go on, let me say by "tipping point to a problem" I mean something within the realm of a normal decline.

The bullish spin on M&A is that companies spend money like this on assets they believe are cheap, and so by extension the market is cheap, headed higher, and they are upbeat on economic and market conditions.

The bearish spin can be summed up with AOL and Time Warner (NYSE:TWX).

Generally speaking, I buy into the idea that increased M&A belies confidence in the environment. But that really has nothing to do with whether the specific deals being done are good investments.

Think about the current situation without an eye to the future for a moment. Interest rates are low, capital is plentiful and the trend of the stock market has been fantastic. This has been the case for a couple of years, and investors (corporate and individual) should have very few complaints. Since things have been going well with this backdrop, what's to say it can't continue for another year or two?

The bearish case right now is very compelling. I lean that way, but it has not started to manifest itself yet in equity prices.

Those who think we are in a bubble -- if we are it could last a lot longer than those people think.

M&A provides fuel. It feels like it could provide fuel for several more months, maybe six or so. I am not a buyer of any of the deal stocks, in fact I noted being a seller when it looked like Yahoo was a deal stock the other day.

The way I look at things, I don't have to be right about how long this lasts. If the market knifes lower, I am less inclined to get defensive. If the market rolls over slowly, I am more inclined to think defense.

Does it really matter if the prediction about when is right?