There have already been $2 trillion in global mergers and acquisitions announced in 2014 and in the eyes of most market watchers the deal making is just getting started. A combination of low rates, a favorable market for corporate credit, $1.3 trillion in cash on corporate balance sheets and a U.S. tax code driving so-called “inversion” takeovers is making the prospect of doing a deal more attractive now than any point in corporate history. Yes, that includes the junk bond bubble of the 80s.
Thus far inversion deals, particularly in health care, have been the main catalysts for acquisitions. Forget patriotism. America was founded by people looking to avoid taxes. It’s un-American not to minimize your tax rate. All things being equal a company like Medtronic (MDT) would like to repatriate cash held overseas but by buying Dublin-based Covidien it can save an estimated $4 billion.
Congress can complain but corporations are following the very baffling, byzantine tax-code D.C. created.
What would catalyze the frenzied portion of the M&A trend is the threat that the environment for deals is going to get worse. Congress is making noises about changing laws on repatriation or penalizing companies that move overseas for tax purposes (if possible). The Fed, which sets the core “risk-free” rate on which all debt prices are pegged is making noises about ending the six year old interest free binge sometime early next year.
As the $2 billion bid for the L.A. Clippers proved, if you want to get rich people to pay too much for something just create a deadline. Right now corporate alpha-dogs in corner offices across the country are deciding whether they want to try and do a mega-deal or put their companies up for sale. Suffice it to say most CEOs consider themselves hunters rather than prey.
Bubbles aren’t about price levels. They are mass events driven by the passion (“madness”) of crowds. We aren’t in a bubble yet because there is no particular fear of missing out. There is simply anger. When market participants and executives feel as though they can no longer afford to stay out of the merger game we’ll have a real bubble.
We’re not there yet but we’re getting close.
Nasdaq 5000
According to GMO’s Jeremy Grantham the M&A trend will surpass anything we’ve ever seen in history, drive the S&P 500 (^GSPC) to 2250 and create what he calls a “fully-fledged bubble” sometime this fall.
What’s interesting about the call isn’t that it’s particularly novel. There have been scores of columns regarding the M&A bubble since the start of the year. For that matter the entire concept of “bubble” has been cheapened to the point of being rendered largely meaningless.