Merger mania is upon us once again, as 2013 has brought with it a slew of M&A activity and leveraged buyouts. Altogether, there has been $160 billion worth of mergers and acquisitions announced so far in 2013. We’re already well beyond the total of $99.6 billion during the first two months of 2012 and have reached the highest total for any first month and a half of the year since 2005.
There were $40 billion worth of deals struck last Thursday alone, with the takeover of Heinz by Warren Buffett’s Berkshire Hathaway and the American Airlines/US Airways merger both being announced on that day. Earlier this month, Dell Computer went private in a $20 billion deal, and Comcast bought up nearly half of NBC Universal for $18 billion.
And this appears to be part of a longer-term trend. While it wasn’t much noticed at the time, there was nearly $1 trillion worth of M&A deals completed in the fourth quarter of 2012. According to the research firm Dealogic, that was the highest quarterly amount in five years.
Investors should keep an eye on these M&A transactions, because these deals can have a significant effect on stock prices. Bankrupt American Airlines’ share price nearly doubled the day its merger was announced, and Heinz jumped up nearly 20 percent the day the Buffett buyout was announced.
And we’re not done yet. Earlier this week, Office Max and Office Depot announced they were in serious talks about merging the two office-supply stores. Those two stocks saw some serious benefits as well: Office Max popped 27 percent the day the merger talks were announced, and Office Depot was up 28 percent. So these deals are definitely worth keeping an eye on.
The next question, though, is: are we in some kind of new landscape where we can expect merger and buyout activity to last for a good long while, or is it just a blip? Let’s take a look at the M&A landscape over the past few years.
The amount of M&A activity peaked in 2007, according to Dealogic. There were 10,695 deals completed that year, at a dollar value of $1.6 trillion. The biggest deal was the $85.6 billion acquisition of BellSouth by AT&T. ConocoPhilips bought Burlington Resources that year for $35 billion. Wachovia bought Golden West Financial for $24.2 billion. The hospital giant HCA went private in a $21.3 billion deal. All told, 42 of the companies in the Fortune 1000 were acquired in that one year alone.
But the end of easy credit that arrived alongside the recession killed off a lot of that activity. By 2009, after all the banking acquisitions — Bank of America’s takeover of Merrill Lynch, Wells Fargo’s acquisition of Wachovia — had been completed, the amount of M&A activity declined to $803 billion. In other words, the dollar value had been cut in half in just two years.
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What’s been interesting in the years since then is that the number of deals being transacted has risen sharply, but the dollar amounts have hung back. At the peak, in 2007, the average merger or buyout was worth roughly $150 million. By 2008, that had slipped to $114 million, and the following year, it went down further, to $108 million.
When M&As began to come back toward the end of the decade, it was these lower-priced deals that came to predominate. In 2010, the raw number of deals moved up over 10,000 again, but the average dollar amount slipped even further, to $88 million. By 2012, there were even more deals than in 2007, setting a new record, but the dollar amount per deal was just an average of $80 million.
So what’s novel and exciting about 2013 so far isn’t just that there are plenty of M&A deals being made; it’s that the high-dollar deals have returned to the scene. But the thing to take away from the example of 2007 is how quickly these types of environments can disappear.
It’s no coincidence that we had a strong market in 2007; mergers and other deals tend to be an artifact of that type of environment. But we also have no idea how long those conditions are going to last. If you want to take advantage of this M&A activity, the time to pounce is right now.
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