Stock Market “Exuberance” Drives Merger Valuations to Record High: Dealogic
“Announced” global volume of Mergers & Acquisitions – “announced” in quotes for a reason, more in a moment – has breached the $700 billion year-to-date for the first time since the crazy pre-collapse year 2007. This includes 125 deals of over $1 billion, totaling $455 billion. Three industries are at it with the most vigor: oil & gas, healthcare, and technology.
This surge in M&A “has been driven by cross-border acquisitions, which have doubled in the last 5 years to $288 billion in 2017 YTD,” according to Dealogic. They’re now also at the highest level since 2007.
US-based companies are on top of the heap of cross-border deals, with $95.8 billion in announced acquisitions so far – “the highest YTD level on record.”
What caused this surge in M&A? According to Dealogic: “Strong equity markets and valuations – which have soared to the highest level on record.”
These “valuations” are measured in EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization), a metric that reflects the target company’s operating performance by removing non-operating expenses.
For the first quarter, “14 times EBITDA is what the Dealogic figures show as the median EBITDA multiple,” explained Dealogic’s head of M&A Research, Chunshek Chan. “That’s something we really haven’t seen over the course of the data that we have. Historically, we’ve been bouncing between 10 and 12 times, sometimes even 13 times. So 14 times EBITDA is certainly a premium to pay for acquisitions.”
Major stock indices are hovering near all-time highs, he said. Hence the high volume and the all-time record premium.
“This is really a translation of the exuberance in the equities market,” he said. This merger boom is “really driven by valuation.”
In other words, higher stock prices beget even higher premiums that acquirers are eager to pay. Over the longer run, M&A rarely produces positive results except for the stockholders of the acquired companies, executive bonuses, and Wall Street investment banks that manage these deals and extract their fees. Many mergers turn into abysmal operational failures, followed by layoffs and often enough, ironically, spin-offs (Wall Street wins again).
Companies are struggling with the tough environment beyond cheap credit and sky-high stock prices. They’ve been stuck in an earnings quagmire for years. Combined earnings of the S&P 500 companies in Q4 2016 were back where they’d been five years earlier, in Q4 2011.
Even after financial engineering is applied with all its might via share buybacks and other strategies, and even by using Wall Street’s favorite most hyped liar-metric, ex-bad-items “adjusted” earnings per share, the combined “adjusted” earnings per share of the S& 500 companies are back where they’d been in January 2014.
In this environment, Corporate America cannot come up with earnings growth – despite or because of the huge wave of M&A. So what’s the solution? More M&A, at record prices and record multiples.
But there’s an additional kink in the equation: the collapse of “announced” merger deals. These mergers were announced with great fanfare. Their huge premiums were hyped with glowing words. They fired up the entire sector and even stock markets for a few days, as analysts were pronouncing the next potential targets, whose shares then jumped.
But then the proposed mergers run afoul of regulators who are worried belatedly about monopolies or oligopolies. Or the proposed mergers run into the buzz saw of other issues. And suddenly the merger collapses and is withdrawn,
Just on Wednesday, the $14-billion merger between two stock exchanges, the London Stock Exchange and the Deutsche Börse, was withdrawn after regulators had a hissy-fit. This brought the total of withdrawn mergers in Q1 to $271 billion, according to Dealogic, the second largest amount of withdrawn mergers ever in a first quarter, behind only Q1 2007.
If pre-collapse year 2007 keeps popping up, it may be for a reason.
This quarter included the second largest withdrawn merger ever. It was proposed, shrugged off, and revoked within a couple of days in February: Kraft Heinz Co.’s $155 billion bid for London-listed Unilever. It’s behind only Pfizer’s $160-billion effort to acquire Ireland-based Allergan, which collapsed in April 2016, after the US government started targeting “inversion” deals that were primarily engineered to dodge US income taxes.
Last year had already seen the highest withdrawn deal volume since 2008, in total 769 deals for $842 billion, “partly reflecting heightened regulatory pressure,” as J.P. Morgen put it.
And J.P. Morgan had an additional explanation for the merger boom, beyond the crazy stock market valuations: “Buyers capitalize on low cost of funding.”
Cash deals – funded by borrowing money, rather than issuing shares – accounted for 62% of the deals in 2016, up from 54% in 2015. And this year, despite rising rates, “the cost of capital is unlikely to be substantially impacted (emphasis added), and we do not think any increases will impede M&A activity.”
So full steam ahead. Overpaying is a virtue. Bogged down earnings, no problem. Record debt levels and leverage are signs of corporate health and confidence, as Wall Street likes to say. Exuberance reigns. Eerie sounds of 2007.
Last time automakers tried this was in 2009! Read… Auto Industry Resorts to Biggest Incentives Ever Just to Slow the Decline in Sales
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now is not 2007, nothing like it, at all.
i’m stuck on that, won’t budge.
Chris,
can you elaborate why you feel that this is nothing like “07. Would be interested in hearing how you feel that it is not similar. Subprime housing, maybe ? Other reasons ?
Maybe because in 2007 the average person didn’t anticipate the magnitude of the collapse. Now we all think the apocalypse is right around the corner.
Errr … looking over the 07 checklist
Subprime home loans – check ..Banks and lending institutions running amuck – check …The average ‘ intelligent ‘ person with a modicum of discernment seeing it coming from a mile away – check .. A Stock Market gone complete insane with little or no substance holding it up – check …Potemkin Villages and Emperors New Cloths as far as the eye can see – check ..Over production – over construction etc , et al ,, ad nauseam – check
Add to that for 2017 ;
Subprime long term auto loans [ on the verge of imploding ] – check ..
An over inflated Macy’s TG day parade balloon pretending he’s autonomous and infallible at the helm intent on destruction and chaos – check … A ballooning real estate market both commercial and residential about to burst – check … The creatures from the Black Lagoon draining the swamp to make room for their own kind – check … A world gone mad over neo -populism verging on New Neo Euro Facism – check
Sorry Chris .. but not only does 2017 look a whole lot like 2007.. its beginning to look potentially a whole lot worse
TJ –
There’s no potentiality about it! It will be, “a whole lot worse”.
Really like your comment. Short and to the point. Hitting each nail on the head, although there are many more nails!
So 2017 appears to be like 2007, only much, much worse.
At the risk of sounding like a broken record, as I have stated this before in the WS comment section, there was one eye-opening stat published in early August 2006 in The Economist that foretold of the housing bubble.
On 1 January 2001, the aggregate residential home value in the USA was $14 trillion. In just five years, on 1 January 2006, that number had exploded to $23 trillion!
As TJ also states, we now have sub-prime auto loans etc, and do not forget the nearly one and a half trillion dollars of student college loan debt that’s hanging around the necks of many of our young citizens.
Indeed housing prices have a long way to fall. A very long way to fall.
Or wages have a very long way to rise.
Considering who owns a huge % of what should be the US housing oversupply. dont be surprised if it is eventually wages that catch up, as those people will control the market. to ensure they never make a loss they cant write off against tax due.
Just like the foreclosure rate rose, as the underwater levels dropped.
Do you really believe wages are going to triple or quadruple to meet grossly inflated prices?
Of course not.
Prices will continued falling to dramatically lower and more affordable levels meeting wages and accelerating the economy and creating jobs like only falling prices can.
This is nothing like 2007 because:
1. This time the municipal sector is broke
2.Underfunded pensions in NJ Illinois Cali
3.20 trillion in debt with CHina/Japan/etc selling Treasuries like madmen
4.Kingpin Rockefeller is no longer
5.HFT have been skimming for 8 years now….Im scared to think of how much liquidity actually is left in Equity Xchanges…
6. Student Loan bubble/Commercial RE bubble/Auto loan bubble
7.Retail/Used car apocalypse.
8.Robots that can flip burgers and lay brick 13X faster than a human..
9.Populace so numb to war no one even thinks we’re in the middle of one (Syria)
10..80 trillion in unfunded liabilities of the .GOV
11.The developed and undeveloped world has just watched the US do QE which was only possible because of the Petrodollar..Do you think this will be allowed again?
12..Russia and China BOTH have alternatives to SWIFT so NO MORE SANCTIONS ARE POSSIBLE WITHOUT SELF DESTRUCTION..
13..Russia has upgraded weapons…They will also have a balanced budget by year end (projected).
14. SGE now operates and LEADS NY and London in Silver price….SGE can only be Physically Settles, so CME and London are both dead in the water..Proof is the complete failure of the NEW LBMA PM trading platform, where both CME and Thompson Reuters have both decided to quit, leaving it with no price discovery provider.
I agree with Chris the Equities are a rock and wont budge…
The hit comes to the USD..
Sorry people but the Emperor has no clothes….
When big companies can’t compete anymore, they buy the competition. This is one of capitalism’s fatal flows that requires government’s intervention. But when government is purchased by the big corporations….
They buy their competition so they can use their namebrand, make the product cheaper and hope to keep all of those customers
In tech, they buy the competition to kill it and steal the staff.
Went thru it twice as one of the “bought” and you are exactly correct. They keep the cream of the crop staff and lay off the rest. Customers see fewer choices and higher prices. Everyone loses except those at the top of the food chain.
> and steal the staff.
Because staff can be owned now.
Fuckers
Sometimes although no so much in America any more it can be an easy way of resolving an “there isn’t enough lunch to go round issue”.
AKA sector consolidation.
This however is not normally done at such high premiums..
“there isn’t enough lunch to go round issue”.
TANSTAAFL
Best case scenario, this all blows up just before midterm elections 2018, giving most political benefit to prospective DEMS.
I am stuck on 1999. 2007 was an anomaly- The years 99-07 was a mishmash trying to recover from 1999. The culmination of the craziness was 2007. The collapse (and the continuing depression) began in 1999.
So here we are. A Trump presidency, 0% interest rates. Our children/ grandchildren unable to get a great starting job on the career ladder, an opioid epidemic with death rates unheard of in previous years, a schism between races, cultures, religions, urban, rural or smaller cities and towns, plus between the haves and the have- nots.
Our infrastructure is a mess. This is not the “can- do” America we were all brought up in.
Yet, I am not worried about the future. I still believe we can pull this miracle off.
Ahhhh … the perpetual ‘ can do ‘ myth . Being in my 60’s just when was this mythical so called ‘ can do ‘ era supposed to of existed ? And exactly what America are we talking about when we go down the Alice’s Rabbit hole of ” Make American Great Again ” ?
Here’s the fact Jack … since 1776 we’ve been a nation of luck and circumstance riddled in between with a whole lot of missed opportunities , destruction and stupidity . e.g. We may be the best mess there is … but that does nothing to negate the fact that we’ve been a mess since day one
So what do you say we drop the myths .. come to grips with reality … and get together to move this mess forward … hopefully to a better place in spite of ourselves
You seem to have a handle Jack, on the gravity of the countries present predicament. Your optimism however, is refreshingly naive. Reminds me of the crooked trader who jumps from the 32nd floor of the exchange. As he passes the 12th floor he’s saying; “Well so far so good”!
More synergy = More layoffs
tJ & outlooking in: I am not naive. I have read clips from 100 years ago, and during the Depression from individuals just like you who predicted the sky was going to fall. Never has! Read Harry Dent and other “prognosticators” of the past 50 years. They have been predicting the same garbage that has failed to come true. Yes, a stopped clock is right twice a day but so far the clock is still moving forward. I am a realist. We are Americans and we will pull together. That may be naive, but, I still see the restaurants filled, the highways full, people taking vacations, etc etc etc. People still laugh out loud, share a drink or two, play the banjo together and sit on the porch with their families. This will only continue.
Jack,
Obviously there are a lot of factors to consider to determine if America will do well or not.
I think people on this board are of the belief that growth is debt fueled.
Too much growing debt in the system coupled with peak demand (peak population) may not be a good recipe for a prosperous future for people in developed countries like the USA.
Also real estate, stock and bond values are high compared to 95% of the last 100 years. Not good.
Sure if the S&P 500 drops by 50% , or real estate in major US cities drop in value by 50%, then i will join you in optimism… after i (hopefully) have the courage to back up the truck.
I had an old Fortune magazine from 1968 featuring the Fortune 500 along with the 50! largest banks. That was back in the first iteration of M&A and the resulting companies were called ‘conglomerates’.
What is telling is that many of these corporate powerhouses were subsumed themselves or just sublimated into nothingness.Kodak was huge as was Sears. No Walmart or Amazon though. RCA and Pan Am topped the list as did banks that no longer exist. Could you even have a list of the 50 largest US banks today that did not compare Goliaths with pygmies.
The problem, as I see it, is that corporate CEO’s tend to be conventional men with conventional outlooks. Good at finance and working a bureaucracy but not very good at seeing the future coming right at them. To try and stay on top while they are in charge they try to manage the future by buying it.
I live here in the Seattle area. Quite frankly after three years, i am sensing that my friends and neighbors are starting to get fed up with my armageddon forecasts.
Families and their extended families pour in to our area from India. They have that look of just having won the lottery. I’m guessing that a good number of them are fully aware that the world’s two richest people live here. Im sure it must be a tremendously exciting feeling for them.
I notice that they are quick to get involved in local politics. It’s very interesting to observe this. They are very close knit people.
akiddy, I’m in the Seattle area too. It’s hard not to think that we’re in a hot economy : cranes are everywhere, everything you hear in the press and the reported house values is great.
There’s a small segment that are skeptical: Gen-X professionals like myself who have battle scars from 2000 and 2008, who are seeing the same set-up now as they saw before, as mentioned earlier in the thread. I think most everyone older has gotten rich from the housing bubble and think they have plenty of wealth in the form of their homes and pensions, and everyone younger just doesn’t remember the dot com craziness and chalk up the 2008 crash to a once in a lifetime thing.
I find it quite interesting that so many people have been telling me ‘Seattle is different! A booming tech sector and well-diversified into industrials with companies like Boeing’, it’s the exact same things that I heard in 2008-2009 before Seattle’s housing market crashed.
It’s quite different when you leave the Seattle bubble though, like if you spend any time in eastern Washington…. those folks, the ones I have talked to anyways, they get it.
Akiddy111. Everything you said is correct. Tremendous debt etc etc etc. I am an old man: 75. I remember when I graduated medical school, my wife was scared out of her wits when we bought a new brick home/ 2 car garage/ AC for $50,000. My father thought that was waaay to much for a house in north suburban Chicago. Everyone spoke of debt then the way this board does now. Amazing when we sold that house for $400K when I retired in 2005. I heard it sold last year for $650+.
My first car was a 1964 Chevrolet convertible for $2200. Dad said, ” that much for a Chevy?” Times change. We will come out of this
“My first car was a 1964 Chevrolet convertible for $2200.”
One of the last good GM, and also on the shortlist of last good American cars ever made.
Do you have any idea what a good one, particularly with the 409, is worth today.
Jack,
We are in totally uncharted territory. To give you an idea of the economic growth to debt levels we are looking at as per FRED :
2006-2016 (10 year) US nominal GDP growth of ….2.9%
2006-2016 (10 year) US national debt growth of …8.54%
I hope we come out of this.