What's Driving The M&A Frenzy?

Here's a question I have for all the students and fans of M&A alike: Why now, and not two, three, four years ago?

How much of the process of merger and acquisition is ego driven, psychology, sentiment -- and how much of it is legitimate, intelligent strategy?

Recall that in 2001-03, there were a dearth of deals. Any buyers back then were getting bargains galore, at rock bottom prices, when the rest of the world HATED DEALS. Now, acquisitive corporate managements are paying premium prices, as profits decelerate and the economy slows.

Isn't it better to buy low and sell high?

Many of the deals we have seen have been all cash tenders. That's not like Google (GOOG) taking advantage of their high share price to acquire YouTube for essentially free.

Whenever we see a massive spasm of acquisitions, it makes me wonder what is it really that is driving the deals -- especially considering that these purchases could have been made for pennies on the dollar a mere three years ago. Back then rates were even lower, China was still growing at 10% year-over-year, taxes were low.

Why the rush to acquire? Is there that much cash around? I don't believe it's the regulators taking a nap. There is much more to this wave than merely that.

Where are the Benjamin Graham aficionados? What say the value players?

When you see Warren Buffett talking about a $40 billion to $60 billion goal for a single purchase, spending his huge cash hoard he took decades to acquire -- despite having one of the world's most valuable currencies -- it makes you wonder if everyone has taken leave of their senses...

Sources:
Buffett's Quandary, M&A Case Study, Sotheby's Surge
David Wilson
Bloomberg, May 8 2007
http://www.bloomberg.com/apps/news?pid=20601039&sid=aHgKUpwhdts8&

As Deal Barriers Fall, Takeover Bids Multiply
Regulators and Size Pose Less of a Problem;
'Nobody Is Off Limits'
DENNIS K. BERMAN in New York, JASON SINGER in London and JOHN R. WILKE in Washington
May 8, 2007; Page A1
http://online.wsj.com/article/SB117858664134395253.html

Comments

[Everyday Finance]

I expect the frenzy to continue and perhaps increase. There is a ton of cash sitting on the sidelines. As hedge fund returns asymptotically approach those of the major market indices, cash is flowing to the next best thing, which is private equity (not quite public M&A per se, but still seeing 30%+ premiums when deals announced taking companies private). The Bush administration is pro-business and will likely sit on the sidelines for the through 2008. Expect these deals to increase at a nice pace leading up to the election uncertainty which kills market momentum each cycle. Plenty of likely takeovers out there still. For these thoughts and more, feel free to check out my site at:
www.everydayfinance.bl...