It’s a deafening drumbeat of mergers and acquisitions, involving enormous amounts of money, dazzling premiums, blinding hype, and some consternation too, as competitors are coagulating into oligopolies.
On Wednesday, property-and-casualty insurance giant ACE, after gobbling up a number of smaller insurers around the world, announced that it would buy its competitor Chubb for $28.3 billion. ACE shares initially jumped over 7% on the announcement, rather than getting hammered for overpaying, though the market later lost some of its early enthusiasm. Chubb initially soared 36% then too gave up some of it. Fun times!
The deal inspired everyone. Drooling investors pumped up the share prices of other insurers: Hartford Financial by 5%; American Financial, Cincinnati Financial, Progressive, and Travelers by over 2%. Party time.
“A deal of this scope tells us that something big has changed, and that is the push for growth,” Citigroup analyst Todd Bault wrote in a note, duly reported as part of the M&A hype.
Health insurers too have been at it with a vengeance in a five-way-takeover kerfuffle between mega-insurers Humana, UnitedHealth, Aetna, Anthem, and Cigna. The latter rejected Anthem’s $47 billion offer as “woefully skewed in favor of Anthem shareholders.” So the price isn’t right yet. And just today, Medicaid-focused Centene announced that it would buy Health Net for $6.3 billion.
These deals are making history.
In Q2, US targeted deals reached $635 billion, the highest quarterly total on record, according to Dealogic. M&A activity in May, at $243 billion, had blown away the prior records: May 2007 ($226 billion) and January 2000 ($213 billion), each of which was followed by a spectacular stock market crash.
In the first half of 2015, US targeted deals hit $1.03 trillion, an all-time record for a half-year period. It included 21 deals at $10 billion and over, amounting to $572 billion, the highest half-year activity and volume on record.
The US healthcare sector scored 537 deals in the first half, amounting to $294 billion, also the highest half-year volume on record, according to Dealogic. That’s up a vertigo-inducing 73% from the first half in 2014, a year that itself had been the biggest healthcare M&A year on record.
This has been great for Wall Street. Goldman came out ahead as US M&A advisor so far this year, with $435 billion in deals, Dealogic reported. Morgan Stanley grabbed $377 billion in deals. And JPMorgan had to make do with $320 billion in deals. Ah, the juicy fees extracted from these deals!
The average valuation so far this year reached 16 times earnings before interest, taxes, depreciation, and amortization (EBITDA). Avago is paying 20 times EBITDA for Broadcom. The prior crazy record was an average of 14.3 times, set in 2007 just before it all blew up.
It “feels like the last days of Pompeii: everyone is wondering when the volcano will erupt,” a senior banker told the Financial Times. The highflying city was buried under lava and ash by the eruption of Mount Vesuvius in 79 AD. But not yet. “Nobody knows,” the banker said. “It feels like we still have some leeway, but it won’t last forever.”
The story is that executives have been afflicted with the “fear of losing out,” and that this fear is driving the boom into the stratosphere. So now is the time to gobble up competitors instead of competing with them. No company likes competition. It makes you work too hard and puts too much pressure on prices.
And the cost of money is so low it’s almost irrelevant. Thomson Reuters in a white paper on M&A pointed out that these deals are nurtured by the cost of funds in the bond markets and by rising share prices in the equity markets. Currently, bond markets “are following the path of quantitative easing,” the authors said. While the Fed has ended QE, the ECB, the Bank of Japan, and others are still pursuing it with a passion. And stocks have soared. That’s feeding the M&A boom with its crazy valuations.
But this time, it’s different. The white paper explained that during the last M&A boom just before the Financial Crisis, private equity firms were the deal drivers, with LBOs accounting for 25% of the activity. Now the boom is driven by corporate buyers. With access to cheap debt and armed with their own overpriced shares, they’re “out-bidding” private equity. And private equity, considered the ultimate smart money, sees these irrational prices, shudders, averts its eyes, and steps back from the melee.
Credit Bubbles and their companion equity bubbles tend not to burst until there is an M&A boom of stunning proportions as part of the final paroxysm. When CEOs are drunk with cheap money and high stock valuations, regardless of fundamentals – that is, when they can borrow nearly unlimited amounts and issue shares at ludicrous valuations to buy competitors instead of competing with them – they create unwieldy, impossible to manage mastodons with easy to manage competition.
That’s the dream, purposefully inspired by monetary policy. We know from the prior two M&A booms and subsequent crashes how this story ends. But yes, so far, so good. Read… It’s a Steamroller, and It’s Headed for Us All
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Almost all of our worst economic excesses arise out of US corruption. In my view that corruption consists of a no longer secret immoral alliance of top financiers and bankers, regulators, executives and their enablers and benefactors in the government.
It is no surprise that all this M&A activity seems to be concentrated in the insurance and health care industries. These are viewed as guaranteed growth industries because government will permit ever increasing insurance premiums and health care fees to be charged and also pass laws that will assure those premiums and charges are paid by the public. That’s how government enablement works.
Even though GDP is reported to grow, its a zero sum game in that as these business’ income grows the public is forced deeper into the hole.
Corruption is around, but the real problem is that the Federal Reserve is unable and unwilling to ‘take away the punch bowl.’ This bubble might exceed our wildest expectations.
Wolf – good point on “private equity firms were the deal drivers, with LBOs accounting for 25% of the activity. Now the boom is driven by corporate buyers.”. These guys are calculating and very savvy sans CEO or BOD egos. And when you consider they are sleuth when it comes to figuring out the proper valuations and have ready access to cheap money (or is it really USED to be?), clean-up the finances/operations and make it out big with IPO down the line. So if these chaps are not as active then that must mean dearth of “good” deals or maybe liquidity is not there?
I think it is a combination of ego and stratospheric share price “currency” which is bound to come down to earth. Banksters and accountant firms make a killing while employees of especially acquired lose their jobs since the excuse for overpaying for a deal is “synergy” of headcount reduction by eliminating duplicate functions/depts.
What I’m I missing here? Wolf, tell us about the best strips clubs, steakhouses, restaurants and hotels for the money in San Francisco. I’m reasonably sure that most of your readership is in the same boat with me. We have two safe deposit boxes (midsize) crammed packed with silver and gold coins and cash. I’ve stashed money here that I may never find again. I doubt that I could get another case of chili in our storage shed. If all these bubbles burst at once, the only thing it’ll mean to me is that there will be shorter lines in the grocery store and longer ones at homeless shelters and unemployment offices. I frankly see that as a good thing. Those who are living above there means will plan better next time, and will laugh, as I did on the idea of renting your car out in order to make the payments. I bought my first car and home on credit in 1961 and have paid cash for all the rest. As you know, I sold Mohawk (MHK) short at $91. It’s now $193 and I couldn’t care less because I don’t buy on margin. If it goes up, it goes up. If it falls to $61 I’ll cover. It’s all really, really simple, moderation will keep you financially secure and happy. There is nowhere to run from the fact it’s survival of the fittest. I’m betting the Greeks vote “Yes.” Well, I’ve got to go. We’re leaving before long on the Royal for another 20 day cruise.
…”safe deposit boxes”…
Wow, so you think they’re safe in a bank? They will take that from you. Get it out now.
Put it in a hole under the shed.
Safe deposit box company’s not operated by banks. Many are 24 hour.
bad bet. Greece: coming soon to a country near you. And you’ve got your goodies in a “safe deposit box”? Distant laughter….
It will land up like AIG and Bear Stearns.
But I think we’re out of ammos after TARP and AIG bailout where the US taxpayers ended up paying banksters here and abroad.
Next up might be Draghi doing favors for his old firm and handlers Government Sachs in collusion with currency manipulator galore (and ex-Nazi collaborator) Soros orchestrating EU TARP or something.
” ex-Nazi collaborator) Soros”
Come on Vespa P200E. You must know that Soros was not even a teenager at the onset of WWII and was and not yet 15 on VE day in 1945 when the war ended and that the collaboration story is an invention of Ann Coulter.
There is video of Soros being interviewed years ago proclaiming gleefully that when he was twelve years old he helped the Nazi’s identify Jews. He said that it was the most exciting time of his life.
I haven’t seen it in years, but that is a rough translation.
Vespa P200E, I removed your follow-on comment to NY Geezer, concerning Soros. It was totally off topic, and totally inappropriate for WOLF STREET. Thank you for your understanding.
Wolf, you have a fine blog and dispense helpful information. I would have deleted my comment above if I could have. It too doesn’t belong on your blog. It’s just that we’re all so totally sick of this financial charade. I’ll do my best to contribute or keep my thoughts to myself. Thanks!
Yes, if by “it” you mean the USA.
I’m imagining corporate executives rearranging and combining ever larger piles of deck chairs on the Titanic.
My view is that all the distortions in the economy – stock prices, bond prices, housing prices, margin debt, stock buybacks, M&A deals, etc. – are greatly amplified by central bank money printing.
Mathematically, debt cannot continue to increase at a significantly faster rate than income forever. If it could, eventually debt service costs would consume more than 100% of income.
So it’s not a question of if, but when the whole sorry edifice of fraud implodes. The economy will hit a brick wall at some point. Since valuations are greatly amplified by money printing, I think the next collapse will also be significantly worse than 2008.
I just need a crystal ball to tell me when the collapse will come.
Puerto Rico’s bond interest dates are mostly January 1 and July 1, with a few issues having interest dates of February 1 and August 1. Puerto Rico did not default on Wednesday July 1. Perhaps Puerto Rico defaults on a few small issues on August 1, and that triggers the beginning of the US collapse. Who knows?
Hopefully after the next decline people will look at those who really deserve the credit for allowing these excesses.
QE 4 coming soon so the volcano still has room to run.
True there will be QE4 but its efficacy will last just a few weeks. Not months or years. July 2015. Its over for the USA.
Massive consolidation with ridiculously overpriced mergers fits my theory of the future pretty well- the central banks will end up having to buy all of it. These consolidations are just the accretion disk of a black hole for the world’s capital.
And note that the share buy-backs are really just the same thing.
Consolidation, removing overcapacity.
EAT, or get Eaten.
Bob, I found your first comment to be not only hilarious but a breath of fresh air. I read it to the wife and we both had a great laugh. If we ever get to the point where it’s impossible to laugh at ourselves our heads will explode! We’re sort of a loose knit family here of like minded individuals who take on all comers. Wolf is a great editor who finds the thread of all these comments and presents them as a coherent theme. I see no reason that comic relief can’t be a part of it.
I am, Dear Sir, your Humble Servant,