M&A slowdown clouds Wall Street view on stocks

Tue May 3, 2016 4:48pm EDT
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By Rodrigo Campos

NEW YORK (Reuters) - Worldwide merger deals have declined sharply from the frenetic pace that pushed them to record levels in 2015, a sign that could reflect broader weakness in the U.S. economy and vulnerability for U.S. stocks.

Previous merger and acquisition activity bursts peaked in 2000 and 2007 and preceded big stock sell-offs. During frothy markets, M&A activity tends to accelerate because companies see opportunity in purchasing growth rather than creating it from within. Investors reward them for their risk taking.

But as bull markets weaken, companies start to look too expensive and investors recoil from the acquiring company's decision, sending its shares lower.

So far in 2015, the dollar value of completed deals is 22 percent below the same period last year. The number of deals is down 13 percent, as expectations of higher interest rates and more government regulation is making mergers seem more expensive and risky.

A couple of high profile deals have fallen apart this year with Halliburton (HAL.N: Quote) scrapping plans to acquire Baker Hughes (BHI.N: Quote) and Pfizer (PFE.N: Quote) giving up its planned takeover of Allergan (AGN.N: Quote). Both deals collapsed under regulatory scrutiny.

"It does concern me that M&A has fallen; that suggests market participants are less optimistic about the future and unwilling to spend their cash or exchange their stock," said Michael Yoshikami, CEO at Destination Wealth Management in Walnut Creek, California, which manages $1.5 billion in assets.

Another worrisome indicator: In 2016, the value of deals rose sharply relative to world gross domestic product, hitting 6.2 percent of GDP after years near or below 4 percent. In the 2007 peak, M&A deals were equivalent to 7.2 percent of global GDP.

Deals completed this year are worth $935 billion globally, a 22 percent drop from the near $1.2 trillion deals made last year to May 2, according to Thomson Reuters data.   Continued...

A man enters the employee entrance of the Pfizer World Headquarters building in the Manhattan borough of New York, U.S., November 23, 2015.  REUTERS/Brendan McDermid/Files