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Investors beware: the masters of the universe are making deals again
A frenzy of companies buying and merging with other companies is underway. As John Stepek explains, that should tell you a thing or two about the state of the stockmarket.
Nearly half of all M&A deals in value terms are being struck in the US
Private investors are often seen as one of the ultimate contrarian indicators.
Mom and Pop', as they put it in America, tend to be late to the market, and late to get out of it. They aren't as well informed as the insiders, so the theory goes.
So they only buy once markets are making new highs and hitting headlines. And they only sell in the depths of despair, when shares are making headlines for different reasons.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
You only need look at the mergers and acquisitions (M&A) boom currently underway to see what I mean.
M&A deals: snapping up rivals at just the wrong time
Overall, it was the best start to a year (in M&A terms) seen since 2007. That's a fascinating statistic when you think about it. We frequently hear that M&A offers poor value for shareholders (in the predator companies at least). And the timing of all these deals shows you why.
The market last peaked in 2007. And that's also when the biggest deals were being done. If all of the masters of the universe behind these deals are so smart, then how come the majority of them buy at the worst possible moment the top just like the retail investors they sneer at? Why weren't they all piling in at the bottom back in 2009?
The truth is that most M&A isn't about getting good value for money. It's about chief executive egos. It's about using lazy, short-term methods to buy growth and market share. It's about finding ways to fiddle key performance figures, so that your bonus gets paid. It's about finding a use for all the cheap credit floating about.
The last thing it's about is shareholder value.
That's why M&A peaks when credit is flowing freely and share prices are high. Deals become easier to finance. Empire building becomes much simpler. And just like any other investor, dealmakers get caught up in the excitement.
Can it tell you much about timing? There's no surefire sign that a market has topped or bottomed. But put it this way I'd rather be investing heavily in the stockmarket when the M&A market is dead, than when it's as active as it is now.
Europe has more scope for overheating
But there are signs that the European market could have further to go. Of the top ten deals in the first quarter of this year, only one was European the sale of mobile telecoms group O2 to Hong Kong conglomerate Hutchison Whampoa. And in fact, the FT notes that deal volumes in Europe as a whole were actually down by 4% this quarter.
That's unlikely to last. The European Central Bank has finally got in on the quantitative easing (QE) act. With money-printing set to be in full flow for at least this year and next, it's only a matter of time before Europe's companies become targets (as the currency falls) or predators (as bored chief executives look for something to do with all that easy money).
This is another reason to favour eurozone stocks over expensive US ones right now. Jonathan Compton looked at some of the best bets in Europe in a recent issue of MoneyWeek magazine. If you're not already a subscriber, get access to the piece and get your first four issues free here.
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