The conventional wisdom is that as deal volume picks up, a bull market should continue. Buyouts always engender bullishness and frequently show up in checklists of things to feel good about.
James Stewart turns this Myth of M&A on its head in Smart Money and posits a theory that deal volume is actually more indicative of market tops than bottoms…
A look at the numbers suggest that deal volume is, if anything, a reverse indicator of market direction. Consider that the all-time record for merger deals in a single year – $4.3 trillion, according to data-tracking firm Dealogic — came in 2007. That’s the same year the Dow Jones Industrial Average hit its all-time high. The feverish pace continued in 2008, until deal volume fell off a cliff after the collapse of Lehman Brothers and stock prices plunged. November 2008 marked the lowest level of M&A activity since 1995, when Dealogic started tracking deal volume.
Stocks bottomed in March 2009. So what happened to M&A activity in 2009, when stocks were undeniably cheap? Deals were few and far between, reaching a total for the year of only $1.3 trillion. The pace of deal making actually increased as stocks got more expensive.
Similarly, in 2000, when the Nasdaq hit its all-time high, global M&A volume reached $3.1 trillion, just behind the then-record of $3.13 trillion set the year before. In 2002, when stocks hit a post-bubble low, deal volume was only $1.27 trillion. (All M&A data are from Dealogic.)
Why are deals done after assets have gotten expensive in the public markets as opposed to when they’re cheap? Stewart speaks with several M&A pros to find out why, click on over…