The patterns of M&A transaction flow should be studied more closely, more broadly, less superficially, than these have generally been studied, when looking for clues into the state of the economy and its prospects. Traditionally, the public markets have served that predictive role, it being an accepted rule that these rise and fall in anticipation of economic cycles. Some of that luster has been wearing thin, however, in light of the wild price swings lately – from year to year, week to week, and now even intraday. And while these markets are scoured and scrubbed for every last inch of information these (often don’t) contain, we look to M&A from afar. Here is an example:
According to a money manager quoted on Bloomberg the other day, “The economic recovery is still in place. M&A deals are an indication of that.” Pause to reflect… Now let’s play devil’s advocate: Perhaps M&A is happening precisely for the opposite reason; which is to say, perhaps it is rather a reflection of an economy still dragging. Strategic M&A is one way to sustain earnings growth on flat revenues – through elimination of duplicative costs – when other options have been used up. (A 10% unemployment rate suggests that other options may have been used up.) Strategic M&A is also a way to augment core revenues that may be stagnant. Neither of these motives are indicative of a recovering economy.
To continue: A handful of the largest technology companies have increased their cashreserves to almost $250 billion in the past year. HP’s blockbuster acquisition of Palm represented about $1 billion of that total. There have been other large transactions recently to be sure, but even SAP’s cross-border deal with Sybase would hardly make a dent in the sector’s savings account. The interest income on a quarter trillion alone could pay for these acquisitions, and the list gets smaller from here. In a recovering economy, one tends to be a net user of cash, rather than a hoarder. In a strong economy, one tends to be a borrower. Based on M&A activity, and playing devil’s advocate as I said, we are clearly not yet at that point.
Coming back to the original argument, it could be interesting and even important to conduct additional studies of corporate M&A activity, regardless of the diversity of interpretation that would inevitably ensue. While the public capital markets have gone through wild swings, as noted, the strategic M&A segment seems to have remained level-headed throughout. Which stands to reason, really. The “strategics” are active participants in the front lines, and they define the economy rather than merely bearing witness.
Studies and independent research about M&A patterns and cycles already exist, and much more can undoubtedly be generated. It could contribute greatly to economic dialogue and market efficiency to make such research more broadly accessible and a greater part of our analysis. There must be a host of information in the details, especially when described over an extended timeframe and in the context of macro-economic behavior. Some examples: cash vs. stock consideration, and what this tells us about the value of cash vs. equity as acquisition currency; earn-outs as a percentage of total payments, and what this tells us about confidence in growth; consolidation vs. expansion plays, and what this tells us about cost-cutting vs. growth objectives; and, for that matter, strategic vs. purely financial activity, and what this tells us about the capital markets themselves.While liquidity was in the last 12 months pouring into equities from every which way, driving prices up by more than 50% and leading us to believe that the broader economy would soon (predictably) follow, the strategics were steadfastly adding to cash reserves. What does this tell us about the state of the economy as seen through the eyes of those who live and breathe it? Economic risks and opportunities may all along have been closer to our immediate notice than we realized.
Disclosure: No positions.