Mergers and Acquisitions Boom! Is This a Good Sign for the Economy?

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Wall Street dealmakers are off to a busy start to 2013, as some of corporate America’s most recognizable names have become involved in multi-billion-dollar mergers and acquisitions. Just yesterday, American Airlines and US Airways announced they would be merging in an $11 billion deal, while private equity firm 3G and Warren Buffett‘s Berkshire Hathaway announced a $28 billion joint acquisition of  food conglomerate H.G. Heinz. And these two deals follow hard upon $24.4 billion leveraged buyout of Dell by private equity firm Silver Lake Partners and the firm’s founder, Michael Dell.

Indeed, according to data from Deallogic, U.S. companies have spent $219 billion on mergers and acquisitions so far in 2013, a sharp increase from 2012, when firms spent just $85 billion during the same period. And U.S. firms are on pace to have the biggest year in M&A activity since 2000.

While all this activity will be surely benefit shareholders of acquired firms — as well as lots of Wall Street investment bankers — what does it say about the health of the economy? Since the late 19th century, mergers and acquisitions have tended to come in waves, spurred by the availability of credit, changes in government policy, or bursts of private-sector innovation. Deregulation, for instance, motivated a wave of mergers in the airline industry in the 1970s and the consolidation of the banking industry in the 1990s. But perhaps the most important factor in motivating these bursts of M&A is economic conditions, particularly the strength of the stock market. Mergers in particular are often financed with stock, and high stock values give companies the resources with which to make purchases.

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But the stock market has been doing pretty well for a few years now, with the S&P 500 up more than 138% since its bear-market lows of 2009. So why are we only now seeing the first glimmer of an M&A boom?

Surely one reason is that today’s market is heavily fortified by quantitative easing. The Federal Reserve has taken unprecedented action to keep interest rates low in both the short and long term, and those efforts have kept stock prices high despite the weak economy. In other words, given central bank stimulus, a rising stock market isn’t quite the indicator it used to be. We can see this in GDP growth figures as well.

In addition to predicting M&A activity, the stock market is also considered a leading indicator of economic growth, meaning increases in GDP generally follow bull markets.  This is because stock prices reflect investors expectations for a company’s future income. A high stock price today represents investors’ belief in big profits tomorrow. Taken in the aggregate, a surging stock market index is a predictor of increases in GDP down the line.

But, just as we’ve seen the link between rising stock prices and M&A severed, the huge gains we’ve seen in stock prices since 2009 have also not been followed by robust economic growth. Again, this is probably because Fed action has done more to promote stock price increases than economic fundamentals. But this is exactly why we should be encouraged by this fast start to M&A activity in 2013, especially if it keeps up in the coming months. It may mean that recent stock market gains are once again reflecting confidence about future profits, and not just central bank stimulus.

What makes this plausible is the fact management won’t seek out — and boards won’t sanction — expensive acquisitions if they’re not confident about future growth. And given the fact that corporate profits have been strong while unemployment remains high and wage growth stagnant means the corporate sector will eventually have to start spending if economy is to recover fully.

So while high profile M&A deals are often times more about CEO empire building than creating real shareholder value, this nascent boom may be a positive sign for the economy nonetheless. It may finally be that rising stock prices are actually telling us something about the real economy around us — and perhaps more important, that corporate leaders are finally feeling frisky once again.

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18 comments
mrbomb13
mrbomb13

For those without a background in Economics, the mergers occurred at the microeconomic level, or at the level of the dominant individual firms in separate industries.  For those particular firms, they will garner increased market share, and thereby maximize earning/earnings potential.  They will furthermore ensure their position atop their respective industries for at the short-term.

However, those microeconomic events are by no means indicators of macroeconomic progress.  The act of firms merging with/acquiring other firms says nothing about the economy in general (which is the realm of macroeconomics).  At most, the M&A events are indicators of dominant firms identifying and seizing upon an opportunity to bolster their competitive advantage in the marketplace.  

At the same time, the firms being acquired may have been weakened over time by the fragile economic conditions.  If that is true, than the M&As could indicate that the economy is not as strong as portrayed in the article.  In other words, instead of expressing the author's optimistic "hope," one would instead want to exercise realistic caution.

zdoker
zdoker

“@amymwilkinson: Mergers and Acquisitions Boom! Is This a Good Sign for the #Economy? http://t.co/aXFtyWCB via @TIMEBusiness” @Forbes KEY!

CyrusRupa
CyrusRupa

@TIME @TIMEBusiness. This is face saving,survival efforts to sustain existance from extinsion.

sarah3o6
sarah3o6

“@TIME: Mergers and acquisitions boom! Is this a good sign for the economy? | http://t.co/T0isiFgT (via @TIMEBusiness)” @Anella_B

JasaniBhavin69
JasaniBhavin69

@amymwilkinson does any one has a choice .. Survival of the fittest. Healthy Synergy does help the economy in the long run

psnively
psnively

@amymwilkinson To the extent it implies liquidation of malinvestment. Tough on those displaced, but probably necessary. /cc @TIMEBusiness

allung89
allung89

@TIME @timebusiness it reduces competition, raising prices in order to maximize profits.

Vedchetan
Vedchetan

@TIME The M&A is still a buff at High Court Bombay. The economy boom gets entangled with Court Procedures!!!

lordofthefly
lordofthefly

A good economic sign for whom? All the people out of work for months who proabblay can get hired only as retail clerks or, if young enough, waiters? Sixty percent of the jobs created during the past four years have been low wage. What will this "economic boom" do for working people - not just those already earning north of $600,000 - and who have health benefits to accompany their big salaries?

lifesmandarin
lifesmandarin

@TIME @TIMEBusiness You always hav smth to say and comment.