The Healthiest M&A Boom in Decades
- Joshua M Brown
- February 16th, 2013
Here we go again - another positive development, another full-court press from the naysayers.
This time, we're being treated to a dissertation on why a boom in mergers and acquisitions is some kind of terrible thing that surely means the market, the economy and our lives are utterly and hopelessly fucked. Because businessmen and women have come out of the bunkers to put some cash to work, we're informed, this is most assuredly some kind of major, multi-year top and probably a massive bubble that will burst and render our grandmother's medications unaffordable, thus condemning her to death.
Take my advice, ignore this. I know these people saying these things - they are utterly unqualified and their motives are not what you think they are.
You see, sometimes when you're a blogger or a reporter at a mainstream media organization, you need to have an interesting angle - and the natural angle a know-it-all will always assume for their own is skepticism. Usually a very specific brand of skepticism that casually snarls "I've seen it all before."
We've had an extremely strong start to the year for deal-making and I think the kneejerk skeptics are wrong about that being indicative of some kind of mania or euphoric peak. In fact, objectively speaking, I believe this particular M&A spate is the healthiest we've seen in this country in decades.
To bring you up to speed, according to Jeff Reeves at Investor Place, announced deals are up 25% year-to-date compared with this time in 2012 and total almost $285.
Yesterday's Berkshire-for-Heinz deal was truly an elephant at $28 billion - larger than Buffett's last elephant, the Burlington Northern railroad purchase cost him $2 billion less. Heinz's CEO William Johnson called it "the largest transaction in the history of the food business." And notably, Buffett paid a 20% premium on top of shares that were already fetching all-time highs. Buffett's been holding tens of billions in cash and there simply wasn't much sense in doing that anymore - so he pulled the trigger. He could've done this a year ago and paid much less.
Don't think he doesn't know that.
And Buffett is not alone in having cash burning a hole in his pocket. In fact, since February 1st we've seen the following (again, thanks to Jeff for compiling):
- In other news today, Cardinal Health, the second-largest U.S. drug distributor by revenue, announced plans to buy private home-delivery firm AssuraMed for $2.07 billion.
- A week or so ago, Liberty Global, a broadband service provider, announced a $16 billion plan to buy Virgin Media.
- American Airlines parent AMR Corp. just announced a deal to merge with US Airways for $11 billion.
- Enterprise software giant Oracle agreed to buy Acme Packet for $2.1 billion.
- Dell will go private for a whopping $24.4 billion, thanks in part to a $2 billion stake from PC partner Microsoft.
- Comcast will purchase the rest of NBCUniversal from General Electric for $16.7 billion.
Should the current pace continue throughout the course of 2013 - and there is no guarantee that it will - this will be one of the most transformative years for Corporate America and globalization in general of all time.
What makes this particular boomtime for M&A healthier than prior peaks is that these deals are being done with cash or funds borrowed conservatively. Ultra-low interest rates are obviously helping, but without a doubt the $2 trillion lying around on corporate balance sheets and enormous cashflow being generated month in, month out are very much a factor here. And this, I tell you, is great news. Companies are no longer content to simply plug along earnings near-nothing on reserves - now they want action. They are getting aggressive again but doing so organically.
Contrast this with, as Peter Lattman at DealBook puts it, "the junk bond craze of 1989, the dot-com bubble of 1999 and the leveraged buyout bonanza of 2007" and frankly there's no contest. The LBO hooligans are barely in the picture right now outside of real estate, The airline megamerger was about taking out capacity and costs while attempting to boost profitability - it was not about financial engineering to make some plutocrat in Greenwich, Connecticut an extra billion bucks. Ditto the Comcast-for-NBC deal and almost all of the rest we've seen so far in 2013.
Bottom line, these are good deals being done with good intentions. And while, of course, some layoffs will always result from mega-mergers, they can also put a floor under pricing power and strengthen industries on the hole inasmuch as confidence breeds confidence. Here's another quote from Lattman's piece in that regard:
“When we talk to our corporate clients as well as the bankers, we keep hearing them talk about increased confidence,” said John A. Bick, a partner at the law firm Davis Polk & Wardwell, who advised Heinz on its acquisition by Mr. Buffett and his partners.
And guys, understand that these are precisely the Animal Spirits that Bernanke and Draghi and the rest have been trying so hard to produce. This is the kind of thing that quickens the pace of business, the intensity and the fervor for growth. When capacity is taken out, assets around the world become worth more and competitors become more brazen. Risks are taken and money is spent. Money is made, transactions spurring transactions spurring celebrations spurring purchases. This cycle eventually turns toxic but not until the end. It runs on virtuously for quite awhile.
So with all due respect to the bloggers and journos who see a bubble every morning they open their eyes and someone else is making money - this merger moment has none of the filthy, disgusting hallmarks of bygone eras. Michael Milken isn't running around dumping buckets of junk-financed capital on the markets, nor is Steven Schwartzman. And we're certainly not seeing anything even approaching the excesses of the dot com era - there are no profitless tech companies using billions in just-created stock to buy others. In fact, the only problem with our tech companies these days is that they're too profitable and have more cash than they can suitably invest!
Quite a difference, you'd have to agree.
And so in this context, we may be looking at the start of the healthiest and most rational era of big M&A in a very long time. And the haters are going to hate anyway.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.