Last year was a record year for M&A activity, but going unnoticed in 2016 is the plethora of mergers that have taken place across many sectors. Whether it is airlines, media, semiconductors or chemicals, this year has been one of the biggest on record in the size and scope of merger deals. Yet, one wonders why so many mergers are happening with the stock market at or near all-time highs just about the entire year.
We have seen companies bought out at record premiums, and often for straight cash. In the old days, we often would raise an eyebrow when a company used its stock as acquisition currency. This is not happening at all today.
Further, international companies have an eye for U.S. companies, too, and this trend is far from over. So, if the market is supposedly expensive on several metrics, why so much buying and possibly overpaying for acquisitions?
We simply can look at the U.S. economy and see there is some daylight ahead. Further, we can see the market is often excited about companies teaming up, with both companies rising (a rarity) on news of a deal.
Oh, we can talk endlessly about how 2% growth is the "new normal." But the fact is that companies are lean, hold tons of cash (which is a great attraction) and are often targets for diversification. Earlier this year we saw some of the biggest acquisition announcements for this very reason, with deals for DreamWorks (DWA) , Virgin America (VA) , Medivation (MDVN) , LinkedIn (LNKD) and St Jude Medical (STJ) .
We have seen our fair share of busted mergers, including Allergan (AGN) /Pfizer (PFE) and Halliburton (HAL) /Baker Hughes (BHI) . Yet, given the insatiable appetite for companies to grow and find value, we could see this trend continue into the end of the year as we perhaps break new records, and quite possibly kick-start 2017 with a bang.