Boom in Mergers and Acquisitions Sign of the End of the Bailout Bubble?
February 26, 2013 • 11:30AM

As with each of the bubbles of the last 25 years -- from the Milken junk bond bubble, which ended with the takedown of Drexel Burnham and the October 1987 stock market crash, to the Asian debt bubble, the bubble, and the housing bubble -- a significant feature of these bubbles was a leap in Merger and Acquisition activity (M&A), prior to their popping. Parallel to today's bailout bubble, which is driving the stock market higher, while keeping the cost of financing low, is a new M&A bubble, which began to take off at the end of 2012, and is picking up steam today. This is not just happening in the U.S., but in the Eurozone, and in Asia and the Middle East, as sovereign wealth funds are jumping in. Such frantic M&A activity is today a feature of the overall hyperinflation, as financial institutions are flush with cash, and in desperate need of short-term profits.

Some comparison with the previous bubbles makes the point:

U.S. M&A activity:

2000 10,472 $1.5 trillion
2001 8,216 $ 794 billion (drop after 9/11/2001)
2004 8,253 $ 852 billion (slow takeoff began here)
2005 8,200 $1.2 trillion (housing bubble takeoff)
2006 10,238 $1.5 trillion
2007 10,695 $1.6 trillion (housing bubble explodes)
2008 8,788 $1 trillion
2009 7,415 $ 803 billion
2010 10,108 $ 898 billion
2011 10,518 $1 trillion
2012 12,192 $ 982 billion (huge jump in 4th Q)

Global M&A activity peaked in 2006, with almost $4 trillion in deals.

In 2011 and 2012, a total of approximately $2 trillion per year in global deals was transacted.

Projection for 2013 -- initially was for $3 trillion, now some are predicting this could go up to as much as $3.5 trillion, especially if it looks as though interest rates will go up next year.

In the first quarter of 2013, there has been a huge jump in M&A activity, with a few recent deals including:

U.S. Air/American air merger -- $11 billion deal;

Berkshire Hathaway takeover of H.J. Heinz -- $23.3 billion, with $12 billion in purchase price from leveraged loans;

Dell Computers going private, at a total cost of $24.4 billion ($7.5 billion from leveraged loans);

Comcast purchase of NBC Universal;

Abu Dhabi Sovereign Fund purchase of 42 Marriott Hotels.

By mid-February of this year, there have already been, in the U.S., mergers announced of $182 billion (in six weeks), compared to only $58 billion at the same time last year.

The bullshit analysis is that there is a "pent-up demand for deals." Reality is plentiful cash (thanks to Bernanke, et al.), cheap debt (also due to low interest rates), a rising stock market (same reason), and weak regulatory oversight.

One analyst said that executives doing the deals "are glad to have an asset (i.e., the company they have targeted for the buyout) replacing inert cash on company balance sheets." Among the targets are companies in food products, energy and tech firms.

And, of course, fees, fees, fees, for the LBO firms, for the companies with cash, and for the lawyers. This is one of the cheapest ways to generate fees, while churning markets overall. One example of this is former Milken Monster Nelson Pelz, whose Trian Fund bought a piece of Lazard Freres last year. Aquila also said the uncertain relationship among currencies will drive the activity, with the devaluation of the yen a key factor.