M&A Rekord Anzeichen fuer kommenden Bear Market?
jungchen : M&A Rekord Anzeichen fuer kommenden Bear Market?
By MARK HULBERT
Published: December 17, 2006
THE total value of mergers and acquisitions this year is already one of the largest in history. That?s ominous, because past merger waves have coincided with overvalued stock markets.
The M. & A. Surge The biggest single year for mergers and acquisitions was 2000, with the totals for 1998 and 1999 only slightly behind. At the moment, 2006 ranks fourth over all. Of course, those earlier three years were at the end of the great bull market of the 1990s, and a severe bear market followed.
Should we be concerned right now? Yes, because the correlation between stock market tops and soaring M.& A. levels is no coincidence, according to Matthew Rhodes-Kropf, an associate professor of business at Columbia, who has studied the subject closely.
?Periods of high relative valuation are nearly always associated with high M.& A. activity,? he said in an interview, ?and the stock market has fallen after each major merger wave.?
Understanding the reasons for the correlation is the difficult part. Though it is easy to see why an overvalued company would want to acquire another ? because it could pay for the deal with overvalued stock ? it is hard to see why the company being acquired ? the so-called target ? would sell itself for stock that is priced too high.
One answer is provided in a theory from Andrei Shleifer, an economics professor at Harvard, and Robert W. Vishny, a finance professor at the University of Chicago. They discussed their idea in an article titled ?Stock Market Driven Acquisitions? in the December 2003 issue of the Journal of Financial Economics. A copy is at post.economics.harvard.edu/faculty/shleifer/papers/StockMarketDrivenAcquisitionsF.pdf.
The professors argue that if the target company?s managers have a short time horizon, they will be willing to sell their company for stock even when they suspect it to be overvalued. These managers may be ready to retire, for example, or have options or stock they are anxious to sell. Because these managers can quickly unload the stock of the acquiring company that they receive in the deal, they may have little concern that it?s overvalued and unattractive from a longer-term point of view.
Another theory was proposed by Professor Rhodes-Kropf and S. Viswanathan, a finance professor at Duke, in an article they wrote in the December 2004 issue of the Journal of Finance titled ?Market Valuation and Merger Waves.? (A copy of the study is at www0.gsb.columbia.edu/faculty/mrhodeskropf/joffinal5.pdf).
According to this theory, a target company?s managers can?t determine in advance whether a high-priced offer reflects real synergies of the potentially combined company or the overpricing of the acquirer?s shares. Professor Rhodes-Kropf says this means that we shouldn?t be surprised by the number of acquisitions that occur during periods when ? from the benefit of hindsight ? stocks appeared to be overvalued.
BECAUSE both of these academic theories focus on deals financed with stock, they apply only partially to the current merger wave, much of which has been paid for with cash raised through debt financing. (This undoubtedly reflects the fact that debt is so cheap right now, Professor Shleifer said.)
Professor Rhodes-Kropf cautions stock-market investors not to take solace in that difference. ?To the extent the current merger wave reflects an overvalued debt market, it stands to reason that it will eventually correct ? just as overvalued stock markets eventually correct,? he said. ?And it can?t be good news for the stock market if money is destined to become much tighter in coming years.?
The bottom line is this: The current merger wave means that stocks are probably closer to the overvalued end of the spectrum than to the opposite extreme, and that they also are vulnerable to tighter money in coming years.
This doesn?t necessarily mean that stocks will fall in the near future. But it does imply that their prospects are well below average.
Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch. E-mail: firstname.lastname@example.org.