Merger Fervor: Why Corporate Mergers and Acquisitions Are So Common in 2016
2016 has been quite a year for corporate mergers and acquisitions.
First, it was Dow (NYSE: DOW) and DuPont (NYSE: DD). Then rivals Bayer and Monsanto (NYSE: MON) followed suit. Next, Tesla (Nasdaq: TSLA) and SolarCity (Nasdaq: SCTY) announced their deal. And most recently, AT&T (NYSE: T) and Time Warner (NYSE: TWX) have joined the party.
These are just a few of the high-profile mergers that have made headlines this year. Why are so many big companies getting hitched? There are a variety of forces behind this trend. Some come from Wall Street, others come from Washington.
By learning to recognize the motivators behind corporate mergers and acquisitions, you can learn how to anticipate them in the future. Let’s dive into the merger fervor.
The Pre-Election Scramble
One of the most obvious reasons for all the mergers and acquisitions is visible every time you turn on a TV, check Twitter… or simply start a conversation. We’re getting a new president in January 2017. We might also see some big changes in Congress and even the Supreme Court.
The changing of the guard in Washington is always worrying for corporations. New leaders can cause jarring changes in tax policy and antitrust law. As a result, corporate mergers tend to skyrocket in the lead-up to a big election year.
You can see in the graph below that mergers are historically more common in the year or two before the election of a new president. Look at 2000 and 2008.
For companies that are considering merging, now is a good time to move forward. They can get all of the regulatory jumping through hoops out of the way before things change.
Meeting Growth Expectations
Another incentive for all the mergers? Investor relations. Now more than ever, companies need big, positive news every quarter in order to keep their stock prices moving.
Earnings reports are becoming an increasingly important part of finance. Some investors feel that this is a good thing. According to them, earnings volatility creates more efficient markets by amplifying equity gains during good times and losses during bad times.
But others, like Larry Fink of BlackRock (NYSE: BLK) call it “earnings hysteria.” They feel that the rush to buy and sell on earnings reports creates excessive volatility at the expense of long-term growth. And they say this forces companies to trot out flashy, encouraging headlines on a regular basis. Otherwise, their investors will turn ultra-bearish at the first missed earnings expectation.
Whether or not you agree with Mr. Fink, it’s easy to see how this short-term thinking encourages big corporate mergers. When a company’s quarterly financials aren’t quite up to snuff, they can launch a high-profile merger bid to keep the story positive. This is an especially prudent move during the so-called “earnings recession” we’re currently in.
Tesla-SolarCity is a good example of a merger as an investor relations move. The star-studded acquisition has changed the conversation about the worrying cash flows of the two companies.
Many of the biggest deals this season, like Bayer-Monsanto and AT&T-Time Warner, are settled but not approved. They’ve worked out the business details in time for the election. But much to the chagrin of the executives, there may be new regulatory hurdles if the review process drags on past November 8.
At this point, most of the strengths and weaknesses of these merged companies have been priced into their components’ stocks. It might be too late to invest in the current round of merger fervor.
But going forward, you now know the signs of a merging spree. In times of political uncertainty and short-term demands from investors, companies like to buddy up. Next time a wave of corporate mergers and acquisitions is on the horizon, you’ll be ready to reap the gains.