Stampede of mergers could mean growth, or irrationality, ahead

Written by New York Times | Updated: Aug 9 2014, 08:03am hrs
Something big is happening on Wall Street that is making investment bankers richer. It is also supposed to signal better times ahead for the rest of the country.

A boom in mergers and acquisitions is taking place, and the stampede is expected to continue even after two headline-grabbing deals Rupert Murdochs bid for Time Warner and Sprints attempt to buy T-Mobile crumbled this week. A sharp upturn in deal activity is often thought to herald a stronger economy and a buoyant stock market. The theory: Corporate chieftains see strength building in their business lines, which gives them the confidence to pursue ambitious acquisitions of other companies.

The corporate sector has been kind of out of it in creating any sort of growth, Savita Subramanian, an equities strategist with Bank of America Merrill Lynch, said. So maybe this is the first salvo in a corporate-spending-driven economic recovery.

So far this year, $2.2 trillion in deals has been announced globally, according to data from Thomson Reuters. That total represents a 67% increase from the same period last year, and it is setting up 2014 to be a robust year for deal makers.

While the surge creates a hefty payday for investment bankers, it is also one more piece of data along with figures showing job growth that suggest the American economy is poised to accelerate out of the doldrums that followed the financial crisis of 2008.

Theres less talk of a double-dip recession or systemic failure, Chris Ventresca, a global co-head of mergers and acquisitions for JPMorgan Chase, said. So an M&A deal feels much less risky than it did until quite recently.

But to some on Wall Street, the deal-making may not in fact be an indicator of golden years ahead. Optimism about economic growth may not be the sole driver of the boom in acquisitions, they assert. Instead, some chief executives may have come to view takeovers as the only way to obtain big increases in revenue in a still lackluster economy. If the deals then disappoint, the economy could also suffer.

And on Wall Street, a desire to strike while the iron is hot always plays a role in any boom. In this case, companies may be forging a lot more deals because the debt used to help finance many of the transactions could soon cost more, particularly if the Federal Reserve raises interest rates next year.

M&A waves always start happening when the economy starts going into the next stage of development, Oleg Melentyev, a credit strategist at Deutsche Bank, said. But corporate executives may be thinking, Cheap capital is not going to be around forever, and Id better start doing something today.

Some investors say they already see signs of irrationality. David Einhorn of the hedge fund Greenlight Capital recently observed that some companies he is betting against or selling short, in Wall Street parlance have become the targets of takeovers, even though, in his view, they have significant weaknesses. Companies we are short often have serious problems, of which the boards and management are probably aware, he wrote in a recent letter to investors in his fund. This makes them more eager than usual to sell at any sort of premium.

Even so, analysts say that several of the big deals done this year make sense. Comcasts pending $45 billion acquisition of Time Warner Cable, for instance, offers a way for Comcast to gain a truly national presence, including in major cities like New York.