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Another Merger Wave Unwinds


Though there recently have been reports of some sizeable merger and acquisition (“M&A”) transactions, I continue to see more news about the decline in M&A activity. That reminded me of a quote from a Harvard Business School professor about the cyclicality M&As (emphasis added):

Each of the last six great merger waves on record ended with a precipitous decline in equity prices. – Professor Mathew Rhodes-Kropf, Harvard Business School

The Six Great Merger Waves

The merger waves going back more than a century that Professor Rhodes-Kropf referred to were the ones from the:

  1. Late-1890s (followed by the Panic of 1901),
  2. 1920s (followed by the Great Depression),
  3. 1960s (during the Nifty Fifty Bubble),
  4. 1980s (followed by the Savings & Loans Crisis),
  5. Late-1990s (during the Tech Bubble), and
  6. Mid-2000s (followed by the Subprime Mortgage Crisis).

Data from the past 30 years on public and private U.S. companies acquired by North American companies (“U.S. M&As”) shows the last three merger waves ended with recessions. As shown in the following graph, this indicates merger waves coincide with business cycles.

merger acquisition waves M&A subprime mortgage tech bubble savings loans S&L crisis recessions business cycles

The fourth (ending with the S&L crisis), fifth (ending with the bursting of the Tech Bubble), and sixth (ending with the Subprime Mortgage Crisis) merger waves each ended with a recession

Merger Waves Are Now on Steroids

You can also see the M&A waves that occurred during the Tech and the Subprime Mortgage Bubbles were much bigger than the one that occurred before the Savings & Loans Crisis. Why? Conditions have changed. Interest rates since the 1980s have decreased substantially, which made acquisition financing cheaper.

Incentives have changed, too. Employee stocks options, which typically motivate senior executives to find ways to boost earnings per share, accelerated in use in the 1990s. They also became a normal part of executive compensation by the Tech Bubble. This motivated and continues to motivate senior executives to engage in financial engineering activities, including M&As. As shown by the upward-sloping yellow arrow, it is clear to me that capital markets are currently in their 7th great merger wave.

Seventh Great Merger Wave?

For the calendar year 2015, total U.S. M&As swelled to USD$1.49 trillion. If M&As continue to grow, then it would suggest the business cycle has more room to run. Unfortunately, that is not the case. As illustrated in the graph below, U.S. M&As for the 12 months ending January 2016 peaked at USD$1.55 trillion. This exceeded the previous peak of USD$1.53 trillion that occurred in the 12 months ending July 2007: the height of the Subprime Mortgage Bubble. Trailing 12-month U.S. M&As have since early this year dropped by 44% in only 8 months, which is consistent with the end of another merger wave. Given M&A waves normally coincide with business cycles, then the current business cycle is likely coming to an end, too.

merger acquisitions M&A wave subprime mortgage bubble quantitative easing ZIRP

Two merger waves from 2004 to 2016 driven by the Subprime Mortgage Bubble and Quantitative Easing plus ZIRP

Whether or not you believe M&A waves end with precipitous declines in equity prices, please consult an investment fiduciary before making any investment decisions.

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