Many mega deals are being carried out these days that are fueling what market watchers call the "M&A Boom." A bang in mergers & acquisitions (M&A) is taking over from the prolonged trend of share buybacks. This seems to be the most dynamic force behind US equity markets as companies are hunting for growth amid continued low interest rates.
Globally, in the second quarter of 2015, M&A volumes rose by 34.6% YoY to US$ 1.33 trillion as of 26 June 2015. The same has been recorded as the highest since the 2007 peak. Some of these deals include Royal Dutch Shell Plc's US$ 70 bn acquisition of British rival BG Group Plc. Other is the cable operator Charter Communications Inc's US$ 78.7 bn merger with Time Warner Cable Inc. The motive behind this is simple- easy money, fat corporate wallets and hassle-free targets. Further, low interest rates and strong assurance among chief executives have supported the surge in such deals.
As stated in an article in the Financial Times, buyers have paid record valuations for takeover targets in the US this year. However there has been a major difference between the recent booms as compared with that seen in 2007. The latter was to a large extent fuelled by private equity-backed leveraged buyouts, as opposed to this year's strategic deals. Valuations are the centre of discussions for recent M&A's. Moreover what remains same is the investment banker's ability to push up valuations.
Companies spend years on studying a potential target. However, if somebody else ends up making a deal before they do, it results in a need for the buyer to come up with a more compelling offer. This leads to high valuations which do not match the underlying value of the business. Investors should be wary of such deals which may sound attractive. One should not jump into making decisions based on the ongoing trend that the market is witnessing. Just because two companies join hands does not mean the foundation will be much stronger now.
Investing in a company just because it has merged with or acquired some other company is no guarantee of returns. Also, it cannot make your portfolio risk proof. One should consider factors such like business fundamentals and the valuations of both the companies before making any decision. We would recommend you to invest wisely and not let the current market trend of M&A in various sectors alter your emotions. It reminds us of a quote by Blaise Pascal - "All of human unhappiness comes from one single thing: not knowing how to remain at rest in a room." So be patient, have an independent approach, practice value investing and enjoy the ride.