In real estate they call it the fence-sitter phenomenon. People who have long considered buying a house finally pull the trigger as mortgage rates climb a bit from low levels. The psychology seems to be: “I better lock in this deal while I can.” We might be seeing a similar pattern play out among corporate CEOs, who could soon choose to jump into the busy M&A game as they see borrowing rates turning higher.
Corporate mergers and acquisitions are already running near a record pace globally. But relative to the total value of the stock market, deal-making volumes still have plenty of room to rise to match the pairing-up frenzy of prior bull market cycles.
The necessary conditions for lots more M&A have been in place for a while: Cash-rich big companies, generous debt markets, sturdy equity valuations and a mature economic cycle that has many corporate lever-pullers seeking to buy growth after years spent buying back their own stock.
Yet with Treasury yields lifting and threatening to enter a somewhat higher range, the fence-sitters might feel that it doesn’t get any easier from here to finance a deal, win over a target company or sell one to their board.
The Verizon Communications Inc. (VZ) deal to buy AOL Inc. (AOL) got more than its share of headlines and head-scratches this week, but at $4.4 billion was a relatively modest-sized transaction. Alcatel-Lucent (ALU) and Nokia Corp. (NOK) got together in a union valued at four-times as much, as Pando Daily points out. And how about industrial conglomerate Danaher Corp. (DHR) Wednesday winning an auction for filtration-products maker Pall Corp. (PLL) for $13 billion and then electing to carve the merged company in two?
This is the kind of action that can provide escape hatches for shareholders and keep stock-market bears on the defensive. It’s not a reason in itself to get excited about buying into the market at these levels, but it’s one more way that value can be extracted from companies even as corporate-profit growth stalls.
There aren’t many direct investment plays on broad M&A activity, but the Gabelli Enterprise Mergers and Acquisitions mutual fund (EMAAX) is a fair proxy for the kinds of companies a clever veteran investor sees as beneficiaries of corporate copulation. The value of the fund – which is full of consumer, healthcare and media names – has made a post-2007 high.
The chart of Goldman Sachs (GS) stock is a pretty good illustration of this story, too. The stock just quietly nosed above $200 a share again for the first time since the eve of the market top in late 2007. This is, of course, not just because the firm is a big player in merger-advice, but what’s going right for Goldman is all part of the same story. Goldman is the perennial leader in deal advisory, mediating more than 25% of all global deal volume in any given quarter. And all the things that help promote more M&A – strong stock markets, lubricated debt markets, healthy risk appetites – also support Goldman’s trading and underwriting businesses.
Of course, all of this is dependent on the capital markets holding together, no major blow-ups out of Europe or emerging markets to throw investors and CEOs back on their heels. And, of course, this global lift in bond yields could be a head fake. But if not, then the CEOs finally opting to hop off the fence and feed their expansionary ambitions should keep the deals popping.