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Mergers & Acquisitions

02/08/2013

Not a day passes that the counter argument to the current S&P 500® Index (SPX) rally isn’t presented. In the wake of 2008, I respect that exercise and view it as constructive for prudent money management. However, it is also important to seek what is supportive for the market as well. Early in 2013 it appears the weakening yen, pure money flows, and dissipating macro headwinds are lending support. There are also less obvious supportive signs that, once identified, should be paid attention to by investors.

Collectively, it seems the cash-rich corporate world is feeling more optimistic. In fact, for Q4 2012, mergers and acquisitions global volume (Figures 1.1, 1.2, and 1.3) recorded $713.08 billion, the highest level since Q3 2008.  The average deal premium was +24.62%, the fifth highest quarter in the last 10 years. So far, Q1 2013 is tracking with the second highest quarterly premium over the last 10 years at +33.41% and overall volume value of $212.67 billion. Of the $212.67 billion spent, $102.73 billion has been targeted in North America -- $87.87 billion in the U.S. and $14.86 billion in Canada.

2013 Largest Global Deals to Date

  1. $21.63 billion for Liberty Global to acquire Virgin Media on February 5, 2013 (Cash and stock)
  2. $17.74 billion for multiple private acquirers to acquire Dell on February 5, 2013 (Cash)
  3. $11.28 billion for OCI NV to acquire Orascom Construction Industries on January 18, 2013 (Cash or stock)
  4. $ 9.73 billion for Thai Beverage to acquire Fraser and Neave on January 18, 2013 (Cash)
  5. $ 7.90 billion for DISH Network to acquire Clearwire Corp on January 8, 2013 (Cash)

2013 Industry Breakdown

  1. Telecommunications – $36.51 billion
  2. Computers – $18.09 billion
  3. Real Estate – $14.31 billion
  4. Engineering & Construction – $13.26 billion
  5. Mining – $9.77 billion

I like the correlation between deal premiums and future SPX direction. Let’s take the top five quarters for highest premium over the last 10 years. Three of those five can be correlated to SPX performance on the balance of that year. Obviously Q4 2012 and Q1 2013 cannot.   At the end of Q2 2003, the SPX (Figure 1.4) was trading 974.50, and by that year’s end was 1111.29. In Q1 2009, the SPX (Figure 1.5) closed out at 797.87, and by year’s end 1115.10 was the print. Lastly, at the end of Q1 2007, the SPX (Figure 1.6) was 1420.86, and on the final day of that year 1468.36. Overall, the willingness to pay higher premiums are an excellent indicator of sentiment and potential SPX appreciation over the coming quarters.

Top 5 Quarterly Average Premium Values over the last 10 years

  1. Q2 2003 +65.25%
  2. Q1 2013 +33.41%
  3. Q1 2009 +28.32%
  4. Q1 2007 +24.74%
  5. Q4 2012 +24.62%      
At the very least, investors should begin to pay more attention to global deal activity. As I highlighted, it can flash a positive signal or, as was the case in the third quarter of 2012, a negative signal. Deal premiums for Q2 2012 were only +17.98% and for Q3 2012 +20.24%. Volumes fell in Q3 2012 to a mere $471.77 billion. Not surprisingly, subsequent 2012 SPX (Figure 1.7) price action experienced a correction from late September into mid-November.


Fig 1.1 Merger & Acquisition Deal Volume Prior Ten Years 2003-2013

Source:  Bloomberg

Fig 1.2 Merger & Acquisition Deal Volume Prior Four Years 2009-2013

Source:  Bloomberg

Fig 1.3 Merger & Acquisition Deal Volume Prior Two Years 2011-2013

Source:  Bloomberg

Fig 1.4 SPX 2003

Source:  Bloomberg

Fig 1.5 SPX 2007

Fig 1.6 SPX 2009

Source:  Bloomberg

Fig 1.7 SPX 2012

Source:  Bloomberg

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