Surge in M&A raises concerns over market peak
The absence of a huge surge in deal activity might be more worrying
Does the recent spate of large-scale M&A signal that a top in the market is being reached? That is what some prominent investors are worried about after the surprise $143bn bid by Kraft Heinz for Unilever last week, which was later abandoned.
Jeff Ubben, founder of ValueAct and leading player in the world of hedge fund activism, this week raised worries that companies are getting too active.
Mr Ubben, an investor who prodded Towers Watson and Willis to merge and Valeant to roll up lots of smaller drug companies, told a Reuters Newsmakers panel on Wednesday night: “You can see it in the risk-hungry nature of corporations. At these extremes the stock market is usually baiting you to do the wrong thing. The private equity guys made the top in ‘07. They were buying everything and they learned their lesson. The corporations didn’t play the ‘07 game and now they are going to make the top.”
But is he right? There are several counter arguments to this, not least that deals numbers are not running red hot.
The number of M&A transactions involving US companies in 2016 was the lowest of any year since 2005, bar the crisis-nadir year of 2008. Activity has been concentrated among larger companies so the value of deals is hardly depressed, but last year’s deal total of $2tn was lower than 2015’s $2.4tn even after a spike in the fourth quarter of 2016.
Absent Unilever, the first quarter of 2017 does not seem on course to break any record, either. A few megadeals would send the numbers soaring, and it is true that news of last week’s bid approach caused Kraft Heinz shares to leap by almost as much as Unilever’s, suggesting the market would welcome the deal. But whatever you think of the cultural mismatch between the two companies, there was a cost-cutting rationale.
That is a far cry from 2007, when cheap financing, unchecked leverage and tax favours led private equity bidders to drive up stock market valuations. Ironically, it is the absence of a huge surge in M&A activity that might be more worrying. Both private equity and strategic buyers will tell you they are wary about valuations, and high valuations do not bode well for future stock market performance.