World-changing corporate transactions just seem to keep coming. It won't last, however.
The number of multibillion-dollar deals announced in recent weeks is staggering by any measure, particularly in an election year, when the uncertainty tends to drive away deals.
Time Warner's & AT&T's $85.4-billion proposed tie-up has dominated the headlines as consumers latch on to tales of media dominance, but in October alone, $329-billion worth of deal activity in the United States has been announced, according to Thomson Reuters, a record. The worldwide number, $483.1 billion, is also no slouch and the fifth highest on record. Other gigantic deals include General Electric's combination of its oil business with that of Baker Hughes, British American Tobacco's $47-billion takeover offer for Reynolds American and Qualcomm's $38.5-billion deal for NXP Semiconductors. One of the biggest deals this year is Bayer's $56-billion takeover of Monsanto.
Looming in the future are potential other big deals like a recombination of Viacom and CBS.
Conventional wisdom is that this activity is all about cheap money. Interest rates are at 400-year lows and the world is awash with liquidity as investors try to find anything that yields a decent rate. Capital markets are so well developed that AT&T can seek to borrow $40 billion to buy Time Warner without missing a step. The days of the financial crisis are well and truly over as lenders are again jumping to lend - albeit at lower leverage rates. (We did learn something from the crisis, thankfully.)
The other broad force driving this merger boomlet is confidence. The worldwide economy is choppy, but we are actually in a period of stability. Britain's vote to leave the European Union has come, and though it may prove to be a disaster for the British economy, it has not brought the trade bloc down with it.
Indeed, since the British referendum on June 23, the British stock market is up about 15 per cent. The decline in the value of the pound has spurred deal-making, like Softbank's $32-billion acquisition of the British chip maker ARM Holdings.
The United States economy remains in a moderate growth mode, pending any upheaval in the election results, and Europe and Asia are experiencing low growth but stability. In such a global economy, corporate chieftains can risk of making a deal. A survey by the accounting firm EY found that 75 per cent of executives expect to forge a deal in the next year. Forget about shareholder value; the top priority of any chief executive is to remain employed. And in a sluggish economy with few obvious opportunities, a big merger has become the only way to acquire growth or a new product or new technology and ensure that the chief executive holds on to power.
The challenge facing chief executives is compounded by the changes wrought by technology. Companies, particularly in technology, media and telecommunications, are racing to keep up and avoid being outmaneuvered. Microsoft's $26.2-billion purchase of LinkedIn can be viewed solely as a defensive play - keeping its global reach on the internet. This trend has also been apparent in the pharmaceutical and biotechnology deal making of the past years as companies bought drugs instead of developing them. And tech itself continues to produce new challengers and spur further deal activity. The potential initial public stock offering of Snap at very likely an extraordinary valuation will push other tech companies to go public, generating more money in the pockets of the tech elite to make acquisitions. But the result of all this merger activity is a broad push toward oligopoly, meaning industries are dominated by just a few big players. Take media and telecommunications. We are heading into a world that is focused on video as people spend their lives on their smartphones, at least for now. The AT&T-Time Warner combination is built on this premise as AT&T's chief executive, Randall L Stephenson, bets that the money in telecom is in content.
In this new media world, there will probably be four or five big providers of content, two of which will certainly be Facebook and Google. AT&T is making its play to stay in that elite league through its proposed acquisition. A cynic might see the AT&T deal and others getting ahead of any changes to our inadequate antitrust laws. In a low-growth economy, getting bigger and squeezing out competitors is a clear way to success. Yet the monopolistic power play has changed. In the case of AT&T, its businesses do not overlap with those of Time Warner. This is a so-called vertical merger, which is harder to stop, and there is little history of the government doing so.
It is how Facebook has been allowed to preserve its dominance by acquiring WhatsApp and Instagram - two emerging potential rivals that were swallowed before they could challenge the Google/Facebook dominance.
You may have noticed that the "bigger is better" mantra is not politically popular at the moment. Republicans and Democrats alike have called for regulators to block the AT&T-Time Warner deal.
In Washington, you can expect not just greater enforcement but possibly a change in the laws to focus on corporate giants that dominate a market through their immense size.
So there is a rush to get deals through before the laws change. Either way, things are not getting better. And the risk of being left behind because of technological disruption and change is driving companies to make acquisitions faster. It is also a trend that, not surprisingly, affects larger companies. Thomson Reuters reports there have been 615 deals year to date, down from 967 in 2014, so the deals are concentrated at the higher end.
This trend is spurring the return of the oft-derided conglomerates that came about in the 1960s. As was the case then, instead of growth and survival, we may just end up with bloat.
At the moment, it is hard to find anything that can slow the merger train. Everything is going right. But it is in these times that perhaps caution is necessary. The merger market has always been cyclical. The current is moving forward, but sentiment can change. In addition, the risk of disruption still exists, whether it be the United States election, renewed uncertainty in Europe or global turmoil from Russia. And there is the prospect of higher interest rates, and how that will affect cheap deal financing is anybody's guess.
If we have learned anything from more than 100 years of corporate mergers, it is that the lurking influences eventually emerge and the current trends driving all of this merger activity are unlikely to last. Let's hope it ends slowly and not with a sudden burst.
The number of multibillion-dollar deals announced in recent weeks is staggering by any measure, particularly in an election year, when the uncertainty tends to drive away deals.
Time Warner's & AT&T's $85.4-billion proposed tie-up has dominated the headlines as consumers latch on to tales of media dominance, but in October alone, $329-billion worth of deal activity in the United States has been announced, according to Thomson Reuters, a record. The worldwide number, $483.1 billion, is also no slouch and the fifth highest on record. Other gigantic deals include General Electric's combination of its oil business with that of Baker Hughes, British American Tobacco's $47-billion takeover offer for Reynolds American and Qualcomm's $38.5-billion deal for NXP Semiconductors. One of the biggest deals this year is Bayer's $56-billion takeover of Monsanto.
Looming in the future are potential other big deals like a recombination of Viacom and CBS.
Conventional wisdom is that this activity is all about cheap money. Interest rates are at 400-year lows and the world is awash with liquidity as investors try to find anything that yields a decent rate. Capital markets are so well developed that AT&T can seek to borrow $40 billion to buy Time Warner without missing a step. The days of the financial crisis are well and truly over as lenders are again jumping to lend - albeit at lower leverage rates. (We did learn something from the crisis, thankfully.)
The other broad force driving this merger boomlet is confidence. The worldwide economy is choppy, but we are actually in a period of stability. Britain's vote to leave the European Union has come, and though it may prove to be a disaster for the British economy, it has not brought the trade bloc down with it.
Indeed, since the British referendum on June 23, the British stock market is up about 15 per cent. The decline in the value of the pound has spurred deal-making, like Softbank's $32-billion acquisition of the British chip maker ARM Holdings.
The United States economy remains in a moderate growth mode, pending any upheaval in the election results, and Europe and Asia are experiencing low growth but stability. In such a global economy, corporate chieftains can risk of making a deal. A survey by the accounting firm EY found that 75 per cent of executives expect to forge a deal in the next year. Forget about shareholder value; the top priority of any chief executive is to remain employed. And in a sluggish economy with few obvious opportunities, a big merger has become the only way to acquire growth or a new product or new technology and ensure that the chief executive holds on to power.
The challenge facing chief executives is compounded by the changes wrought by technology. Companies, particularly in technology, media and telecommunications, are racing to keep up and avoid being outmaneuvered. Microsoft's $26.2-billion purchase of LinkedIn can be viewed solely as a defensive play - keeping its global reach on the internet. This trend has also been apparent in the pharmaceutical and biotechnology deal making of the past years as companies bought drugs instead of developing them. And tech itself continues to produce new challengers and spur further deal activity. The potential initial public stock offering of Snap at very likely an extraordinary valuation will push other tech companies to go public, generating more money in the pockets of the tech elite to make acquisitions. But the result of all this merger activity is a broad push toward oligopoly, meaning industries are dominated by just a few big players. Take media and telecommunications. We are heading into a world that is focused on video as people spend their lives on their smartphones, at least for now. The AT&T-Time Warner combination is built on this premise as AT&T's chief executive, Randall L Stephenson, bets that the money in telecom is in content.
In this new media world, there will probably be four or five big providers of content, two of which will certainly be Facebook and Google. AT&T is making its play to stay in that elite league through its proposed acquisition. A cynic might see the AT&T deal and others getting ahead of any changes to our inadequate antitrust laws. In a low-growth economy, getting bigger and squeezing out competitors is a clear way to success. Yet the monopolistic power play has changed. In the case of AT&T, its businesses do not overlap with those of Time Warner. This is a so-called vertical merger, which is harder to stop, and there is little history of the government doing so.
It is how Facebook has been allowed to preserve its dominance by acquiring WhatsApp and Instagram - two emerging potential rivals that were swallowed before they could challenge the Google/Facebook dominance.
You may have noticed that the "bigger is better" mantra is not politically popular at the moment. Republicans and Democrats alike have called for regulators to block the AT&T-Time Warner deal.
In Washington, you can expect not just greater enforcement but possibly a change in the laws to focus on corporate giants that dominate a market through their immense size.
So there is a rush to get deals through before the laws change. Either way, things are not getting better. And the risk of being left behind because of technological disruption and change is driving companies to make acquisitions faster. It is also a trend that, not surprisingly, affects larger companies. Thomson Reuters reports there have been 615 deals year to date, down from 967 in 2014, so the deals are concentrated at the higher end.
This trend is spurring the return of the oft-derided conglomerates that came about in the 1960s. As was the case then, instead of growth and survival, we may just end up with bloat.
At the moment, it is hard to find anything that can slow the merger train. Everything is going right. But it is in these times that perhaps caution is necessary. The merger market has always been cyclical. The current is moving forward, but sentiment can change. In addition, the risk of disruption still exists, whether it be the United States election, renewed uncertainty in Europe or global turmoil from Russia. And there is the prospect of higher interest rates, and how that will affect cheap deal financing is anybody's guess.
If we have learned anything from more than 100 years of corporate mergers, it is that the lurking influences eventually emerge and the current trends driving all of this merger activity are unlikely to last. Let's hope it ends slowly and not with a sudden burst.
© 2016 The New York Times News Service