Last year was a record year for M&A, but going unnoticed in 2016 is the plethora of mergers that have taken place across many sectors. Whether it is airlines, media, semiconductors or chemicals – this year has been one of the biggest on record in size and scope. Yet, one wonders why so many mergers are happening with the stock market at/near all time highs just about the entire year? The worst of course occurred during the first six weeks of the year and it has been up ever since.
We have seen companies bought out at record premium, and often for straight cash. In the ‘old days’, we would often raise an eyebrow when a company used their stock as acquisition currency. This is not at all happening today. Further, international companies have an eye for US companies too, this trend far from over. So, if the market is supposedly ‘expensive’ on several metrics, why so much buying and possibly overpaying for acquisitions?
We can simply look at the US economy and see there is some daylight ahead. Further, we can see the market is often excited about companies teaming up, with both companies rising (a rarity) on news of a deal. Oh, we can talk endlessly about how 2% growth is the ‘new normal’, but the fact is firms are lean, hold tons of cash (which is a great attraction) and are often targets for diversification. Earlier this year we saw some of the biggest acquisitions made for this very reason with Dreamworks, Alaska Air, Medivation, LinkedIn and St Jude.
Just last week we heard Qualcomm come out and say they were interested in paying a big premium for NXP Semiconductor, and both stocks soared on the potential news.
We have seen our fair share of busted mergers, including Allergan/Pfizer and Halliburton/Baker Hughes along with possibly Monsanto/Bayer (regulatory issues). Yet, given the insatiable appetite for companies to grow and find value we could certainly see this trend continue into the end of the year as we perhaps break new records, and quite possibly kick-start 2017 with a bang.