M&A Heads to Record $5 Trillion Year Despite, Well, Everything
(Bloomberg Businessweek) -- It’s been a big year for deals. There’s the planned merger of AT&T’s media businesses with Discovery, the high-stakes takeover battle for railroad Kansas City Southern, and Square’s agreement to acquire the Australian “buy-now, pay-later” company Afterpay. Despite PayPal Holdings Inc. ruling out a potential acquisition of social media companyPinterest Inc. for now, global deals could top $4.1 trillion this year, breaking the record set in 2007. By the end of 2021, transactions could easily top $5 trillion.
That’s all the more exceptional considering all the reasons not to make a deal. The pandemic is still raging, the global economy is volatile, and the U.S. and Europe are signaling a tougher approach to antitrust. The business of buying and selling companies traditionally depends on a belief that things are, if not entirely rosy, at least predictably benign. And yet companies seem prepared to swagger through the uncertainty. “We’re not seeing the momentum slowing down in any way,” says Elizabeth Crain, chief operating officer of investment bank Moelis & Co. “The fundamental factors that have been driving M&A for the last 12 months continue.”
Those factors include low interest rates, which make it cheap for companies to borrow, and a surfeit of cash, which companies are itching to put to work. Yet both have been present for several years, so why the boom now? In a simple sense: market psychology. The same frenzied optimism that has gripped retail investors is affecting chief executive officers and corporate boards, too.
The bullish outlook also gives them a lot of leeway with their shareholders. Traditionally, investors don’t love deals. They tend, often rightly, to believe that buyers overpay and are prone to destroying value, and they often sell an acquirer’s shares when news of a purchase becomes public. Recently things have flipped: Investors have become cheerleaders, often rewarding acquisitive companies and pushing their stocks up on the news of deals. Some flashy combinations still get pushback—so far investors seem skeptical of PayPal’s notion of combining its online payment business with Pinterest. But over the past three quarters, shares of companies that bought another business outperformed the broader global market by more than 2 percentage points, according to data from consultant Willis Towers Watson.
The changing reaction to mergers and acquisitions is part of the wider investment appetite for companies that can tell stories about their growth and transformation, whether or not they are currently pumping out earnings. It’s a time for meme stocks, big bets on cryptocurrencies, and empire builders such as Elon Musk. Corporate dealmaking, with its power of instant and sometimes dramatic change, fits the mood. When people are getting rich swapping virtual coins, why shy away from buying an actual company?
One conspicuous part of the merger boom has been the rise of special purpose acquisition companies, or SPACs, which are empty corporate shells that go public with the sole purpose of acquiring another business. Financiers, celebrities, sports stars, and just about anyone with a branded personality have raised billions of dollars from investors through SPACs and have often used them to merge with startups looking for a shortcut to public markets. More recently the celebrity transaction has gone the other way. One SPAC announced that it’s merging with a new Donald Trump-backed social media company—which has yet to introduce its product—and its share price soared.
Deals done today are struck in a moment at ease with startup culture and risk. For a CEO in 2021, the willingness to give a deal a try could mean the difference between having a job and not. The privations of Covid-19 may also have helped stoke what economist John Maynard Keynes called “animal spirits” in the corporate management suite. Business titans have been deprived of many of the things that make their jobs fulfilling: flying around the world, opening new offices, and meeting and greeting staff and clients. Like millions of others, they’ve been staring at screens a lot. “CEOs who advisers could never pin down for a meeting are now doing two-hour sit-downs and going through the books, because they have that time back,” says Daniel Wolf, an M&A partner at the law firm Kirkland & Ellis. “People think great deals happen because of moments of great insight or chemistry, but sometimes they just happen because people have time on their hands.”
Another famous economist, Milton Friedman, argued that the only purpose of a corporation is to make money for the shareholders. But shareholders and CEOs are also humans hungry for experience, and right now it seems as if a lot of them have an itch to see their companies go big.
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