Mergers & Acquisitions: The Next Accurate Economic Predictor?

So, what’s the big deal about M & A’s anyway?

Mergers & Acquisitions have traditionally been linked to investor confidence in the market, directly leading to more money going into the stock market. M & A activity has been very low since the recession began as CEOs are unwilling to take big risks, instead holding on to cash assets.

So, let’s take a look at some previous cycles of M & A Activity and how they corresponded to the stock market:

1) In 2007, there was a total of $4.3 trillion dollars worth of M & A activity. During this time, the DJI was at its all time peak. In 2009, there was a total of $1.3 trillion. Now, compare this to $90 billion in the last full week of August. Experts were hoping this would cap off an investor rally, but expectations were cut short by weak economic indicators. September tends to be a highly volatile economic month and positive indicators can help the stock market recover from its miserable August trading.

2) In 2000, total M & A reached $3.1 trillion dollars, almost a record for the time. At this point, the Dot Com industry was booming and stocks were at an all time high. However, in 2001, only $1.13 trillion of M & A activity was recorded- marking the start of the Dot Com crash.

3) Large deals make investors happy for a variety of reasons, sending signals to buy more stock. While people are worrying about the global economy, firms actually spending money to expand sends bullish signals to pundits, increasing hopes of more buying. Furthermore, investors tend to think companies buy when stocks are cheap (which is often incorrect) and that the financial climate is improving.

4) Banks and law firms are one of the largest winners of M & A’s. For example, the 40-billion takeover bid of Potash would have garnered 8 financial firms almost $200 million in consulting and legal fees. On average, 0.5% – 0.8% of total costs goes to these firms, so in a year with $4 trillion of M&A’s, they make over 4.8 billion dollars.  The total revenue grossed in bullish years is enough to dent their operating costs- signaling easier access to credit for buyers.

5) Spending money is a sign of more certainty in the future. It shows predictability in the economy and consistency. In our current vacillating economy, CEOs are reluctant to purchase because they don’t know whats going to happen the next quarter, much less over a longer time span. Companies rather hold on to assets than risk losing money over poor decision making. This is why they tend to takeover not when stocks are at the bottom, but when they hold their price over an extended period of time.

Hopefully, this article has shed some light on a clear economic indicator. If you follow finance, keep your eyes open for more Acquisitions in the coming months. It may be a key tip for your investment strategy.