After reading a post positing that the merger of two mammoth brewing companies presages a worldwide economic slowdown, I began to wonder what you can in fact conclude from mergers and acquisitions and I think the answer is “not much”.
Consider the chart above which depicts the number of mergers and acquisitions in the United States over time. To me the graph looks pretty noisy but if I squint and look at it in the right light I see two things.
First, there may be a very weak up-tick in M&A just before the beginning of an economic turndown. If there is, it’s not a very strong trend and it might be completely obscured as more and more industries consolidate. My off-hand guess is that two $100 million companies merging operates on a different clock than two $100 billion companies and, as the number of $100 million companies shrinks (something inevitable based on prior spates of M&A and lower rates of business formation) and the number of $100 billion companies grows, the graph will just get noisier.
Second, if there’s any trend its downward. Fewer mergers and acquisitions. See above.
Is my thinking on this wrong?
“Is my thinking on this wrong?”
No.
We used to own a large producer of label paper for both the Miller and Budweiser brands. This was in the 2000 – 2005 time frame. Putting them together was always just around the corner. Years later, and multiple acquisitions in the interim, and it may happen. Doesn’t sound like the economic cycle to me.
The second major factor, especially for number and not dollar volume, is the amount of money flowing from pensions and endowments into private equity vs into public equity or fixed income. That’s not economic cycle. Throw in general credit conditions and the anti-trust posture of an administration and you’ve got two more big variables. Lastly, we have shotgun marriages for strategic survival in particular industry settings. Look at health care insurers right now. That’s a lot of stuff that supersedes general economic conditions.
That all said, would anyone be surprised to see commodities related companies merging after the commodity-super cycle end? Hell, should Canada merge with the US? Just think, “Welcome to Hockey Night in N America…..” (Couldn’t resist)
It’s a mixed bag, but as an industry participant I’d be very careful touting M&A as a leading economic indicator. As for the downward trend, I’d have to look at some more data and perhaps not the Schuler or Drew eyeball-o-meter. Who wrote that post?
Guy named Rodney Johnson. The post is here. I think the “business cycle is winding down” but I don’t think you can tell that from M&A.
Read his piece. Not buying it. Sure, sluggish industry growth encourages consolidation and growth through acquisition. But that’s sector driven.
Second, it’s important to separate dollar and unit M&A activity. Yes, the beer boys can make a splash in the statistics with just one big dollar deal, but not the unit stats. Unit stats are dominated by private equity whether buy or sell, even to strategics. Those are leveraged deals and firms are loathe to lever up just ahead of a downturn in the economy.
I just don’t see it, and have never heard anyone make that connection before.
I meant to mention this earlier. The question is sometimes asked here and elsewhere why corporate profit margins are at above historical norms and capex low. I’ve read that as many as two thirds of defined industry sectors are more concentrated today than in the mid-90’s.
That would naturally lead to those results. Another example of the big getting better off, and the small getting hosed.