Will an M&A Boom Lift Sagging Markets?

Leo Kolivakis's picture

Via Pension Pulse.

Anupreeta Das and Gina Chon of the WSJ report, Deals Stage a Comeback:

merger activity is sweeping to its highest levels since late 2009,
presenting a glimmer of economic confidence while the bond and stock
markets continue to price in a weakening U.S. economy.

On a day
of bleak jobless news and a 144-point drop in the Dow Jones Industrial
Average, Intel Corp. surprised investors by unveiling plans for a $7.7
billion all-cash takeover of Internet security company McAfee Inc. That
came just hours before First Niagara Financial Group Inc. in Buffalo
announced the biggest bank merger since the peak of the 2008 financial
crisis, a $1.5 billion acquisition of NewAlliance Bancshares Inc.


Both deals pale in size next to BHP Billiton's hostile $39 billion offer for Potash Corp. of Saskatchewan, disclosed Tuesday.


deal activity had been weak through most of 2010, as corporations
husbanded cash and waited for more signs of economic revival. Many of
the biggest deals have come in Asia, historically a laggard in the
merger game.

This week's moves suggest some executives have grown
restless waiting for the broader economy to turn. Nearly $85 billion
of transactions have been announced since Monday, the highest weekly
sum since the week of Dec. 13, 2009, when Exxon Mobil Corp. announced
its $40 billion acquisition of XTO Energy Inc., according to Dealogic


One factor may be the cash
burning in their pockets. U.S. public companies carried $2.03 trillion
in cash and short-term investments at the end of the first quarter,
according to data from FactSet Research. That's about 57% above the
level at the same tome in 2006.


"I wouldn't say that CEO
confidence is a 10 for M&A; I would say it's more of a 7," said
Jeffrey Kaplan, global head of global mergers and acquisitions at Bank
of America Merrill Lynch. "This week's deals are about the ultimate
expression of confidence."


The weak overall economy is actually
helping one important aspect of deal making: financing. Interest rates
on investment-grade and junk bonds have continued to fall by the day. On
Thursday, yields for 10-year Treasury notes dropped below 2.6%,
helping push corporate borrowing rates to historic lows. Even companies
with weaker credit can attract funding at a level that makes deals


As the stock markets continue to tread water,
opportunism is also in the air. When Blackstone Group agreed to buy
power generator Dynegy for $550 million last week, Dynegy's stock
hovered at its all-time nadir.

Interestingly, BHP tendered a $40 billion all cash offer
to acquire Potash Corporation at $130-a-share, a 20% premium, and Intel
unveiled a $7.68 billion purchase of antivirus software maker McAfee
at $48-a-share offer, a hefty 60% premium.

Earlier this week, Stéfane Marion, Chief Economist & Strategist at the National Bank of Canada wrote a comment, Word: M&A activity levels remain depressed:

& acquisitions (M&A) activity has been unusually muted at this
point in the recovery. Uncertainty about financial markets and the
sustainability of the economic recovery has led companies to hoard cash
rather than spend. Sitting on a pile of cash when many central banks are
pledging to keep interest rates low for the foreseeable future does not
offer much of a return, particularly if the economy actually continues
to grow (albeit at a slower pace). Fortunately, the BHP bid for Potash
is a sign that the notion of “animal spirit” is still a concept that
needs to be reckoned with.

this mindset persists, we certainly have a catalyst to drive equity
markets higher. As today’s Hot Chart shows (click on chart above), the
total value of merger and acquisitions relative to the size of global
GDP remains well below its historical average of 3%.

But not everyone is convinced that an M&A boom is on the horizon or
that mergers benefit acquirers. Zachary Mider of Bloomberg reports, M&A Losers in $10 Trillion Deal Binge Led by McClatchy, Sprint:

than half of the 100 biggest takeovers made during the last
mergers-and-acquisitions boom have something in common: By one measure,
they never should have happened.


stocks of 53 companies that made the biggest purchases from 2005 to
2008 lagged behind industry peers two years later, according to data
compiled by Bloomberg’s ranking group. Among the worst performers were
McClatchy Co., Boston Scientific Corp., and Sprint Nextel Corp., all
three of which are now valued at less than the price they paid for
their acquisitions.


Companies struck
$10 trillion of deals during the last merger binge, even after more
than a decade of research showing deals often don’t pay off for the
buyers. The average stock price of all the top acquirers trailed
benchmark indexes by an average of about 3 percentage points.


“As a CEO, you are forced to think about growth, think about
outperforming others, building the biggest and most dominant
corporation in your sector, and you will do deals,” said Alexander
Roos, a partner at Boston Consulting Group.


“Everyone is always very
convinced of being the first to know how to do it right.”


Worse at Peak


Deals executed during a financial boom tend to turn out worse than
those done in a slump, according to research by Roos. Even so, a lack
of access to cash and credit can lead companies to shelve purchases at
the most opportune time. The global economic slowdown that began at the
end of 2007 coincided with a collapse in the M&A market, with
annual takeover volume falling by more than half from the peak, to $1.8
trillion last year.


“If you can get things
at low prices, you’re going to make money,” said Donna Hitscherich, a
senior lecturer in finance at Columbia University and a former M&A
banker. “But you have to have the courage of your convictions.”


Buffett had one of the top-performing deals in the Bloomberg ranking
after his Berkshire Hathaway Inc. bought PacifiCorp for $5.1 billion in
2006. Berkshire’s stock outperformed a benchmark index by 35
percentage points, making PacifiCorp the ninth-best deal in the


That doesn’t mean the
billionaire investor hasn’t had deals turn sour. In 2008, Buffett
applied the lyrics of a country music song by Bobby Bare to missteps in
M&A: “I’ve never gone to bed with an ugly woman, but I’ve sure
woke up with a few.”


Best, Worst


SA, the best-performing acquirer in Bloomberg’s ranking, was boosted
when it also became a takeover target. Paris-based Suez purchased
shares in Belgium’s Electrabel SA that it didn’t already own for about
12.6 billion euros ($16.2 billion). Suez was itself later bought by Gaz
de France SA, helping the shares beat a benchmark index by 83
percentage points.


purchase of the Knight Ridder Inc. newspaper chain, for $4.1 billion in
2006, ranked the worst of the 100 on Bloomberg’s list, with McClatchy
shares underperforming the Bloomberg Advertising Age AdMarket 50 Index
by 93 percentage points. Sacramento, California-based McClatchy
borrowed cash to buy the chain as newspaper real-estate advertising
plunged. Elaine Lintecum, McClatchy’s treasurer, declined to comment.


Boston Scientific outbid Johnson & Johnson to buy Guidant
Corp. for $27.5 billion in 2006. The takeover diversified Boston
Scientific’s product line while leaving it to deal with tens of
thousands of safety recalls linked to Guidant defibrillators. The stock
traded 64 percentage points below the Standard & Poor’s 500 Health
Care Equipment Index two years after the purchase. Paul Donovan, a
spokesman for Boston Scientific, declined to comment.


Sprint Nextel


Sprint’s $36 billion combination with Nextel in 2005 led hundreds
of thousands of customers to defect to competitors and pushed the stock
47 percentage points lower than industry peers. The company is now
valued at about $30 billion including debt.


Sprint has made “great strides” in the past 2 1/2 years in improving
its customer experience, strengthening its brand and generating cash,
said Scott Sloat, a spokesman for the Overland Park, Kansas-based
company, in an e-mail. The combination with Nextel also allowed Sprint
to bring the first fourth-generation mobile-broadband network to
customers, he said.


of buyers may be growing less tolerant. The biggest transaction
announced this year, Prudential Plc’s $35.5 billion offer for an Asian
insurance unit owned by American International Group Inc., fell apart
when Prudential’s investors refused to support it, calling the price
too rich.


Among smaller purchases,
stockholders of Charles River Laboratories International Inc. last
month scuttled a planned $1.6 billion acquisition of WuXi PharmaTech
(Cayman) Inc.


the past decade, large institutional investors have grown more willing
to speak out against an acquisition, a strategy the activist hedge
funds pioneered, said Christopher Young, head of takeover defense at
Credit Suisse Group AG.


“rambunctiousness,” Young said, has only grown since the depths of the
financial crisis in 2008. “Shareholders are saying capital is a scarce
asset, you should use it wisely.”

Despite these missteps, I see an M&A boom on the horizon. Cash rich
companies will look to grow through acquisition. What does this mean for
large pension funds? They should already be invested with Merger
Arbitrage hedge funds (beware of betas in merger arb funds), and more importantly, they should be overweight the top companies that are being acquired and underweight the top acquirers.

for the overall market, an M&A boom couldn't come at a better time.
Sagging markets need a lift, and big acquisitions will help bolster
confidence. Will it be enough to propel markets higher? If you couple
this with the Fed sponsored liquidity tsunami, it might spark things up
again, but if the economy keeps weakening, a lot of merger plans might
be placed on hold or permanently shelved.

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mynhair's picture

M&A is the last resort of the unimaginative.  If it were worth a shit, some vulture like Cerebrus would already have done it.



Mitchman's picture

Well, Cerberus certainly loves the "A" part of M&A.  Let's see.  In 2007, I believe, they acquired Chrysler and they acquired GMAC. How's that for earning your 2 and 20?  :-)

mynhair's picture

Yep, Cerebrus is always ahead of the curve.

Like I said, M&A is for morons.

geno-econ's picture

Wonder if anyone has done studies on impact of M&A on employment . Productivity no doubt is enhanced as well as pricing power and global competetivenes . This brings us to the observation that the economy is driven by global forces and national well bieng is sacrificed . While the US in the past has had many advantages , more recently we are losing our edge for many reasons:

         Dwindling crude oil production

         Mobility of technology

         Emergence of developing economies (cheap labor)

         Debt financing spiral--- Keyensiam gone amuck

         Political corruption , unjust tax system and hocus financial engineering

         Unsustainable entitlements ,health system ,pension regimin--Leo?

There are many more US disadvantages that overshadow Yankee innovation etc. but does Leo really believe M&A is the  answer ? Me thinks not



anony's picture

Will the 6,000 mergers and acquisitions result in even greater unemployment?

Those who cheer the conglomeration of companies are men who have vision no further than the length of their noses.

Kayman's picture


It's even shorter than that- their dicks....

Chip's picture

Don't kid yourself--it's already starting. Just not too fast to move the market:



kaiserhoff's picture

Buy Chinese solars.  Smoke more hopium!

Thanks for the eye candy and the shots of Santorini, Leo.  Haven't been yet, but it's on my short list.  Hell, the way this crappy, rigged market is going, you may even be right once in a while.  God knows there are no blue chips left.

Leo Kolivakis's picture

Friday was option expiration. The crooks and their algos were busy all this past week rigging several stocks. It's amazing the amount of nonsense that goes on during option expiration week. I should take snapshots of various stocks and the open interest on puts & calls just to document the shenanigans. Of course, the SEC is all over it...NOT!

traderjoe's picture

So true, Leo. I watch AAPL get pinned every week, for one. Which other stocks do you find they are successful on?

Leo Kolivakis's picture

Pick any of the big names, and look how they perform during options expiration weeks. It's quite laughable, but these are "free" markets. Many investors are rolling positions forward to September expiration, when there is the quarterly expiration of equity futures and options:

"With today being August options expiration, option traders are busy rolling positions out to the next month, September, either to extend a profitable position, or extend a losing position in hopes of turning the trade into a winner," said Joe Kunkle, a founder of analytics firm OptionsHawk.com in Boston.


August options on individual stocks go off the board on Friday after the close and settle on Saturday.


"During September expiration, investors typically reassess their positions at the end of the third quarter and then make their plans for the year-end and beyond," said TD Ameritrade chief derivatives strategist Joe Kinahan.


Overall options action seems to reflect cautious investor sentiment after two weeks of losses for the stock market, said WhatsTrading.com options strategist Frederic Ruffy.

lbrecken's picture

blah blah blah ....M&A activity always gives ST boost but it foreshadows slowing growth as cos. attempt to grow via consolidation rather than end demand growth.  Jez its 101 yet still no one sees the forest from trees

divide_by_zero's picture

Still puzzled by the Intel McAfee buy, normally you buy the best with that kind of money on hand, not a second or third rate AV company.

SoCalBusted's picture

Me too.  Intel has enough smart people and money to build vs. buy.

blunderdog's picture

Intel's a hardware company, not a software company.  Even their hardware isn't that great.

I suspect this is just about finding another way to generate revenue off the large computing public--if you just sell them processors, you don't get a renewable revenue stream.  AV "subscriptions" are perfect.

ZackAttack's picture

It sounded to me like this wasn't intended for the general PC market.

What they *say* it's about is providing on-chip security for embedded systems

Leo Kolivakis's picture

Celente thinks 'Too Big to Fail' Is Killing the Middle Class:

August has been a hot bed of merger & acquisition activity, including:

  • — Intel to buy McAfee for $7.7 billion
  • — Mining giant BHP Billiton wants to takeover agricultural goliath Potash for $40 billion.
  • — Dell to buy 3PAR for about $1.2 billion in cash
  • — First Niagara Financial Group agreed to buy Connecticut’s NewAlliance Bancshares Inc. for about $1.5 billion in cash and stock.

M&A activity is generally viewed as a good sign for the market and economy.

To the contrary, says Gerald Celente, director of the Trends Research Institute. “This country went from a nation of Main Street, mom and pop businesses to Wall Street and 'too big to fails',” he tells Tech Ticker in this clip. ("Not only were they 'too big to fail,' they were 'too big to jail'," he says of Wall Street execs.)

Deregulation and bailouts favor the country’s largest corporations, at the expense of small business, Celente believes. “They’re squeezing out everybody else." Policies like these have created the widest wealth gap in the industrialized world, he says; “10% of the nation controls 93% of the assets."

Former IMF Chief economist Simon Johnson makes a similar point in his book, 13 Bankers. In it, Johnson claims, six banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) control 60% of America’s gross national product.

The only way to turn the tide, says Celente, is to “put back what was in place that worked,” like the Glass-Steagall Act and the Sherman Antitrust Act, which exists in name only. “That’s what stopped the robber barons from raping the country.”

Celente is confident more regulation on the largest companies will help entrepreneurs, which in turn strengthening a fading middle class – the backbone of our society. “America becomes strong again when the middle builds big again,” he says.

Unfortunately, Celente sees the trend going in the opposite direction. “The merger of state and corporate powers, let’s calls a spade a spade. It’s fascism.”


ZackAttack's picture

Hmmm... $2.03 trillion in corporate cash.

Let them pay the bulk of the bailouts, then. After all, so many of these financial contrivances are only there to benefit corporations. I don't give a flying fuck whether there's a functioning commercial paper market, for instance, or whether AIG or any of the investment banks lives another day or not.

The Intel deal makes a modicum of sense. They want on-chip security for their embedded systems. Good idea, rich price. They could've gotten a lot more than a lot less than McAfee, though. Typical corporate brain-dead decision.

BHP's always wanted to make itself the commodity supermarket for the world, so Potash is a pretty logical buy. I don't think most people realize what a precarious situation the world food chain is in. We're OK with one bad year, but two would be very serious trouble for many places on earth.

The kind of deals that are utterly useless are things like, oh, the abortive Sallie Mae purchase by Cerberus. Obviously, they wanted to strip the bones of anything valuable, load it up with debt, spin it off again. Wash, rinse, repeat. Too bad they were too connected to fail for all the dumbass deals they made.



equity_momo's picture

Sorry Leo youre wrong.  M/A and stock buybacks are typical late cycle plays and just confirm what most investors understand right now - we are in a gnarly giant topping phase that will end decidely bearish.

This is not the saviour you are looking for - in fact its a warning.

TeresaE's picture


More job losses, more empty buildings, more "investment" (transfer) on foreign soil.

Which equates to fewer customers for the rest of us, more people on unemployment & food stamps and good times for all.

Make your money while the making is good.

DiverCity's picture

Exactly what kind of drugs is brother Leo on?

doggings's picture

Exactly what kind of drugs is brother Leo on?

really strong euphoric ones.

Crisismode's picture

Yet another piece of LK drivel.


Why do people even read his inane crap.


He is delusional beyond belief, and still people pay any attention?



Reese Bobby's picture

Well you read it.

And at least it wasn't about a stupid Canadian Fund's rebound performance.

When there is no end market demand growth or attractive cap ex opportunities then M&A is to be expected.  Expand your corporate empire and harvest G&A expense cutting opportunities.

But another poster is correct.  With dividend tax increase less than 6 months away it would probably make more sense to return capital to shareholders through special dividends.  But that would not offer CEO's the maximum compensation opportunities.

Actually a lot of companies should borrow cheap money and pay dividends.  Why aren't we seeing more of that LEO?

David449420's picture

Sorry, Leo.

The way you see the world, is not even close to the way I see the world.

All of this is just absurd attempts to pretend that the inevitable will not occur.

You're probably 1 or 2 stages up from where I am.

If I can avoid debt slavery in the next few years, then I will consider that I have succeeded.

Finally, just out of curiosity, what color is the sky in your world ?


PS. I am a Canadian with a background of 20 years service in the Military. 



Howard_Beale's picture

Having known and cared about Leo for over a year now, his skies are full of rainbows and unicorns, with scattered flying ponies on cloudy days and puppy dogs everywhere.

williambanzai7's picture

Er, you seem to have forgotten the lollipop trees...

Howard_Beale's picture

I most certainly did. Loved you BB Facebook, WB. I have been off the site for a while with personal and family matters. 

P Kennedy's picture

Leo- quick answer your title's question: M&A will harvest the good ones strategically,  and the puffed out limps for accounting creativity. Just waiting for the perceptual inflection point: do we proceed onwards, or proceed to hell?

Lot's of money wants to be in motion......

Astute Investor's picture

"I wouldn't say that CEO confidence is a 10 for M&A; I would say it's more of a 7," said Jeffrey Kaplan, global head of global mergers and acquisitions at Bank of America Merrill Lynch. "This week's deals are about the ultimate expression of confidence."

It's ironic that investment bankers have the worst timing when it comes to M&A, their self-proclaimed area of expertise.  They always have a lot of "confidence" and massively overpay at the top.

CSFB / DLJ -- circa 2000

Chase / JPM -- circa 2000



traderjoe's picture

So many of the deals are done out of desperation to keep the CEO's/board in power and occupied, and perhaps even distract the employees from the deterioration of the fundamentals. Look at the Dell/Perot Systems acquisition. CEO's get incentivized to "grow" revenues, and the companies can throw some non-GAAP charges in their results for a little while. 

And their timing is typically terrible. The entire market cap of DTG was $20 million at the crisis low. Probably could have taken the company out for $100 million plus liabilities. Now HTZ and CAR are fighting for it at $1 billion+. If travel falls back again, will the acquisition bring the acquirer down?

Of course, "The Strategy Session" on CNBC, with the King of M&A David Faber says that M&A shows the "confidence of the CEO's" - which you repeated above. Silly. It's in their self-interest to do deals, not their shareholders. The POT CEO getting $450 million to have the company get bought out? Absurd. 

It's all a con game, and you are playing along nicely. How did that GDP & NFP payrolls treat ya? The jobless claims number Thursday? Philly Fed? How are the truck car loading statistics lately?

Graphite's picture

LOL, I love it when people use "historical averages" starting in the year 1990. Here, let me calculate a mean using a period of the greatest manias in modern financial history. Surely, the markets *must* revert to that mean.

I see Leo also retreads the lie that companies are "cash rich," which requires one to look only at corporate assets and ignore their liabilities. It's like saying that someone who takes out a HELOC on 100% of the value of his home and deposits $300K in the bank is "cash rich." He may have a lot of cash, but every penny of it is owed to someone, with interest.

Monkey Craig's picture

well said...looking at just the assets will get you in trouble - ask any BP investor pre-4/20/2010

mynhair's picture

Bp - present.  Lost my ass on that POS.

Hdawg's picture


Small coincidence these moves have happened after the announcement of further Fed monetising, i think not.

M&A will not lift the market but in nominal terms the flood of money printing will.  In terms of physical gold or silver it's going to crash. 

These are all cash offers i.e.  These boys know the deflation story is either short term or a head fake until the inflation storm hits so they cashing in their chips for a real asset.

Just a bit suprised China has not speeded up it's dumping of the USD in a similar way.

ex VRWC's picture

Leo, I got your market right here:


More here:


C'mon and jump in people - we need more of these!


hungrydweller's picture

Yup - and all of this M&A activity leads to increased layoffs and continued deterioration in overall GDP.  Lose-Lose for everyone.

Bottom line is that companies have cash that was generated from efficiency gains over the last two years (i.e., layoffs) and they have to do something with it.  Screw dividends - that's so 1950's.  Can't invest in their own businesses since overall demand continues to decline.  Forget hiring back workers until demand picks up.  Whatever - managements just buys up anything that makes them look good and pads their own wallets.

Astute Investor's picture

The stocks of 53 companies that made the biggest purchases from 2005 to 2008 lagged behind industry peers two years later, according to data compiled by Bloomberg’s ranking group. Among the worst performers were McClatchy Co., Boston Scientific Corp., and Sprint Nextel Corp., all three of which are now valued at less than the price they paid for their acquisitions.

The vast majority of acquisitions are net destroyers of shareholder value.  Full Stop.  It's simply a value transfer from the shareholders of the acquirer to the shareholders of the target.  Clearly a P.T. Barnum situation when it comes to M&A - the primary beneficiaries are the agents - management lawyers, bankers accountants, etc. - all at the expense of the shareholders.  Unfortunately, the M&A charade continues in a never ending cycle despite the overwhelming evidence that marginal value is actually created.


Deals executed during a financial boom tend to turn out worse than those done in a slump, according to research by Roos. Even so, a lack of access to cash and credit can lead companies to shelve purchases at the most opportune time. The global economic slowdown that began at the end of 2007 coincided with a collapse in the M&A market, with annual takeover volume falling by more than half from the peak, to $1.8 trillion last year.

“If you can get things at low prices, you’re going to make money,” said Donna Hitscherich, a senior lecturer in finance at Columbia University and a former M&A banker. “But you have to have the courage of your convictions.”

This is real value-added analysis from BCG and Columbia Business School.  Deals turn out badly when you overpay so the outcome should be more favorable for the acquirer if they buy at a lower purchase price.  These clowns could be 2nd rate retail brokers -- Buy Low and Sell High!


Mentaliusanything's picture

So Leo, your saying that what the World needs now is a lot of AOL- Time Warner M&A's.

Tell me how that worked for the betterment of anyone.

Think Gresham's law of Bad money chasing out Good.

You want me to list all the winners from M&A's. I will write them on the back of a postage stamp. Buffet on the other hand could make shit sandwiches and sell to the punters as Foi gras

Kayman's picture

M & A is solely about controlling market share to the detriment of the competitive market. Pricing power over the consumer will shrink the economy not grow it.

russki standart's picture

Dear Leo

if the market goes into the sh"tcan, based on the horrid market fundamentals and techicals, M&A will do nothing to lift the markets. Most deals happen when equity prices are rising, not falling.  Otherwise, you are on the money <g>

Muscletonian's picture

Leo Leo,


So now its M&A that should take you out of the latest buy on dip failure, was it 1100 you bought S&P. Still holding that sour dough, where is your stop or are you averaging down?

Get a grip, this market is going south due to the phenomena of depression, the global 15 trillion bailout package will never occur. And what has happened so far has not helped a bit.


Buy DAX sell Eurostoxx as we are heading for new sovereign crises in Europe.


I must though give you that you are persistent in your advocating of higher stock markets, but whom do you think your fooling.



covert's picture

I never understood the extreme desire to buyout the competition. why not run them out the hard way?