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It’s a deafening drumbeat of mergers and acquisitions, involving enormous
amounts of money, dazzling premiums, blinding hype, and some consternation
too, as the competitors are coagulating into oligopolies.
On Wednesday, property-and-casualty insurance giant ACE, after gobbling up
a number of smaller insurers around the world, announced that it would buy
its competitor Chubb for $28.3 billion. ACE shares initially jumped over 7%
on the announcement, rather than getting hammered for overpaying, though the
market later lost some of its early enthusiasm. Chubb initially soared 36%
then too gave up some of it. Fun times!
The deal inspired everyone. Drooling investors pumped up the share prices
of other insurers: Hartford Financial by 5%; American Financial, Cincinnati
Financial, Progressive, and Travelers by over 2%. Party time.
“A deal of this scope tells us that something big has changed, and that is
the push for growth,” Citigroup analyst Todd Bault wrote in a note, duly reported
as part of the M&A hype.
Health insurers too have been at it with a vengeance in a
five-way-takeover kerfuffle between mega-insurers Humana, UnitedHealth,
Aetna, Anthem, and Cigna. The latter rejected Anthem’s $47 billion offer as
“woefully skewed in favor of Anthem shareholders.” So the price isn’t right
yet. And just today, Medicaid-focused Centene announced that it would buy
Health Net for $6.3 billion.
These deals are making history.
In Q2, US targeted deals reached $635 billion, the highest quarterly total
on record, according to Dealogic. M&A activity in May, at $243 billion,
had blown away the prior records: May 2007 ($226 billion) and January 2000
($213 billion), each of which was followed by a spectacular stock market
crash.
In the first half of 2015, US targeted deals hit $1.03 trillion, an
all-time record for a half-year period. It included 21 deals at $10 billion
and over, amounting to $572 billion, the highest half-year activity and
volume on record.
The US healthcare sector scored 537 deals in the first half, amounting to
$294 billion, also the highest half-year volume on record, according to
Dealogic. That’s up a vertigo-inducing 73% from the first half in 2014,
a year that itself had been the biggest healthcare M&A year on record.
This has been great for Wall Street. Goldman came out ahead as US M&A
advisor so far this year, with $435 billion in deals, Dealogic reported.
Morgan Stanley grabbed $377 billion in deals. And JPMorgan had to make do
with $320 billion in deals. Ah, the juicy fees extracted from these deals!
The average valuation so far this year reached 16 times earnings before
interest, taxes, depreciation, and amortization (EBITDA). Avago is paying 20
times EBITDA for Broadcom. The prior crazy record was an average of 14.3
times, set in 2007 just before it all blew up.
It “feels like the last days of Pompeii: everyone is wondering when the
volcano will erupt,” a senior banker told the Financial
Times. The highflying city was buried under lava and ash by the
eruption of Mount Vesuvius in 79 AD. But not yet. “Nobody knows,” the banker
said. “It feels like we still have some leeway, but it won’t last forever.”
The story
is that executives have been afflicted with the “fear of losing out,” and
that this fear is driving the boom into the stratosphere. So now is the time
to gobble up competitors instead of competing with them. No company likes
competition. It makes you work too hard and puts too much pressure on prices.
And the cost of money is so low it’s almost irrelevant. Thomson Reuters in
a white paper on M&A pointed out that these deals are
nurtured by the cost of funds in the bond markets and by rising share prices
in the equity markets. Currently, bond markets “are following the path of
quantitative easing,” the authors said. While the Fed has ended QE, the
ECB, the Bank of Japan, and others are still pursuing it with a passion. And
stocks have soared. That’s feeding the M&A boom with its crazy
valuations.
But this time, it’s different. The white paper explained that during the
last M&A boom in 2007, private equity firms were the deal drivers, with
LBOs accounting for 25% of the activity. Now the boom is driven
by corporate buyers. With nearly access to cheap debt and armed with
their own overpriced shares, they’re “out-bidding” private equity. And
private equity, the ultimate “smart money,” sees these irrational prices,
shudders, averts its eyes, and steps back from the melee.
Credit Bubbles and their companion equity bubbles tend not to burst until
there is an M&A boom of stunning proportions as part of the final
paroxysm. When CEOs are drunk with cheap money and high stock valuations,
regardless of fundamentals, that is when they can borrow nearly unlimited
amounts and issues shares at ludicrous valuations to buy competitors, instead
of competing with them, they create unwieldy, impossible to manage mastodons
with easy to manage competition. That’s the dream, purposefully
inspired by monetary policy. We know from the prior two crashes how
this story ends.
Yes, so far, so good. Read… It’s
a Steamroller, and It’s Headed for Us All
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