BOOM! M&A Activity Hit A Record High Last Year! A Good Omen?

How was your year-end bonus for 2012? Not too good? Average? One group of professionals will probably have had a particularly good year in 2012. And they are the dealmakers, in particular investment bankers and lawyers who specialises in mergers and acquisitions. According to the graph below, merger and acquisition activity skyrocketed to hit astonishing levels.

M&As – Historical High In 2012


Source: FactSet, graph on merger and acquisition deals in Singapore in $’million

Excluding the Fraser and Neave – Thai deal (Update: TCC Assets has so far acquired 606.5 million shares worth $5.8 billion) and the Asia Pacific Brewaries – Heineken deal (~$5.6 billion), the total value of deals in Singapore in 2012 will still be historically high at around $15 billion.

Singapore does not seem to be the only country with merger and acquisition deals hitting a high, the US has been experiencing some increased levels of deals coming into 2013. On Valentine’s Day (how apt), 14 February, American Airlines and US Airways announced that they would be merging in an US$11 billion deal. And there is the Warren Buffett’s joint deal to take over Heinz. Below is just a snapshot of the deals that have been published last week alone.

Source: Dealogic , table on top announced mergers and acquisitions

While this level of activity in the mergers and acquisitions realm will undoubtedly line the pockets of investors, what exactly does it say about the economy?

M&As And The Real Economy – A Link?
While there is the argument that mergers and acquisitions usually come in waves and spurts, the strength of the stock market usually provides impetus for these deals. Why? High stock prices help to enable acquiring firms to finance buyouts or for share exchanges.

However, it would seem that this spurt of deals has been somewhat late to the party. The stock markets have been going through a rather impressive run of late. The Straits Times Index has achieved returns of over 121.3 percent over lows experienced in 2009. Why are we experiencing the first wave of deals only now?

Perhaps, one main reason for bullish sentiments in the stock market could be due to record low interest rates as well as the seemingly unending influx of foreign liquidity into the SIngapore market. Already, we see this happening across asset classes, from real estate, to bonds, to stocks and yes to even COEs (certificates of entitlements).

Even the case for linking stock market gains to GDP growth seems to be a failed one. As can be seen in the graph below, the correlation between stocks and GDP growth have become wider since the Great Recession of 2008/09.


Source: FactSet, graph comparing GDP growth (Yellow) and STI stock market gains (Blue)

However, this wave of merger and acquisition deals could be a spark that we are all looking for. It could finally mark the return of corporate confidence about future profits, and not just low interest rates and the like.

Recent Deals A Cause For Hope?
It should be noted that management and boards will generally not permit acquisitions that are expensive if they are not confident about growth. And given the fact that profits of various listed entities have been strong without much wage growth, the corporate sector will ultimately begin spending to push the economy into a more robust recovery. Finally, it might seem that the stock market is once again performing its role as a barometer of the real economy around us – and perhaps more importantly, that corporates are in high-spirits again.

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