Merger Mania Markers

Do mergers signal a market top?

Open the business section today and you can’t miss them: acquisition fever seems to jump off the page: Tyson Chicken is bidding for Hillshire Brands; Man group—a UK hedge fund manager—is buying the Boston-based quant firm Numeric; Apple is spending $3 billion for Dr. Dre’s headphone company, Beats. And that’s just today’s paper. Mega-deals are pending in other areas of the market.

It’s not just our perception: global mergers and acquisitions activity surged 23% to over $800 billion in the first quarter of 2014. Many folks claim that merger mania signals trouble ahead: the last time deal-making was this high was the first quarter of 2008. And we all know what happened that year.

Still, correlation does not equal causation. High-crime areas tend to have more police presence, but that doesn’t mean that the police cause crime. Deals may peak at a market top because all financial activity hits a high level. And wacky deals happen because corporations are run by people: they can get caught up in the market’s euphoria as well. Finally putting all that corporate cash to work feels good.

Any time the market reaches a new high people look for explanations, and investors get nervous. But over-valuation is only clear from the subsequent financial statements, and they only come out later. Synergies and cost-cutting may justify the mergers, or they may be management smoke.

The only thing really dependable about a market top is that six months after it happens, everyone claims to have seen it coming.

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2014-05-30T09:52:28+00:00May 30th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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