This past weekend, AT&T (T) announced its intent to buy Time Warner (TWX) for nearly $90 billion. Several weeks ago, Germany's Bayer (BAYRY) agreed to buy Monsanto MON for approximately $60 billion. Both of these deals, if consummated, promise to create enormous consolidation in their respective industries. Both deals are expected to receive immense regulatory scrutiny, given the scale of dominance that each would have.
Both of these deals also share another commonality. They both will involve an enormous pile of debt to get done. If they are consummated, the resulting companies will be heavily indebted. In the case of AT&T, total net debt could rise to $170 billion. Five years ago, it was around one-third of that figure.
Thanks to record low interest rates, the mania of big mergers is back. One would have to go back to the 1980s and 1990s to remember such colossal deals. Most didn't live up to the hype. Whether these big deals will, either, is to be determined. As an investor, however, I would not succumb to the excitement.
I suspect the deal-making is not over. Corporate earnings are slowing down, stock buybacks appear to be slowing down, and banks are happy to lend to investment grade titans like AT&T. And to be sure, when interest rates are this low, paying a bit more to acquire a quality asset can be a very sensible business move. Whether or not the marriage works, however, is an entirely different proposition.
I don't presume to suggest that the acquisitions won't work: one of the hallmarks of any major deal is the promotion around the marvel of deal and future possibilities. Remember RJR/Nabisco, Time Warner/AOL? There also have been wonderful marriages such Procter & Gamble (PG) /Gillette and Wrigley/Mars.
But as an investor, your only concern is whether you as a shareholder will benefit. Results have shown that many major "blockbuster" deals aren't blockbuster investments later.
So, be prepared for more exciting headlines that will cause certain stock prices to go up. During all the buzz, however, don't lose sight of focusing on undervalued investment opportunities, not over- hyped business deals. It's possible for both to be one and the same, but that determination should be made independently of any biased opinion.