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