UBS: Do M&A mega-deals mark the top of the market?

Big mergers and acquisitions (M&A) can fill investors with trepidation. Major transactions have often been followed by broader market declines; AOL’s USD 112bn purchase of Time Warner in 2000 preceded the dotcom bust by a matter of months. Similarly, the aborted USD 147bn BHP bid for mining rival Rio Tinto was launched suspiciously close to the 2007 market crash. So is the recent spate of mega-deals – including the potential USD 300bn hook-up between Pfizer and Allergan – a cause for concern about the markets in general? We believe not.

Transactions are no cause for concern 

The number of large transactions has certainly been on the rise. In October alone there were two proposed deals in excess of USD 100bn; the aforementioned Pfizer merger and Anheuser-Busch InBev’s USD 117.4bn bid for SABMiller. Both, if consummated, would rank among the top five M&A deals in history. Overall this year companies have announced 54 deals in excess of USD 10bn, taking the total volume of all transactions to a record USD 4trn.

But while historical data suggests a strong market is linked to more deal activity, M&A volumes and values have not been a good predictor of subsequent stock performance.

For example, in March 2006 deal activity hit a then-record USD 1.1trn. Investors who took that as a sign of a market tipping point would have missed out on a 30% rally in the MSCI All Country World Index up to October 2007. Similarly, M&A volumes in 2Q14 surpassed the USD 1trn mark – well above the 10-year average of USD 830bn – yet the Nikkei, Euro Stoxx 50 and S&P 500 indices have all delivered a positive total return since then. In short, there is no statistically significant relationship between M&A values or deal volumes and market outcomes. To the extent it exists, the relationship is actually positive: after all, an environment of high confidence, cheap financing and a desire to invest should boost M&A and the market in general.

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