Will Frenzy Friday Be The Last Hoorah?
April was the biggest month for mergers and acquisitions ever; May could beat it. How long can the boom last?
Bull markets, observed the great investor Sir John Templeton, "are born on pessimism, grow on scepticism, mature on optimism and die on euphoria." On grounds of language alone, we seem to have reached the final stages.
"Manic Monday" was trumped by "Frenzy Friday", with £100bn worth of deals placed on the table in a single day – a sum roughly equivalent to the South African economy.
With hindsight, it was clear that biggest mega-merger of the last bull cycle – the tie-up between AOL and Time Warner in January 2000 – marked the height of the hubris before the crash. Anybody could see the only way for the stock market was down. Should we fear the same of the current crop?
Mergers have a famously mixed record in terms of destroying shareholder value. They are finely calculated gambles on the future and frequently wreck careers, yet there are always executives willing to gamble their reputations.
The remarkable thing about the current wave is that it engulfs almost every sector: from media and metals, through retail, banking, tobacco and building supplies. Companies are taking advantage of unprecedented financial resources to further their ambitions and, as long as those remain available, the deals will keep coming.
Yet cash is only part of the equation – its equally potent partner is fear. It's almost a cliché to rehearse the impact of globalisation and the digital revolution on companies, yet these factors are feeding an eat-or-be-eaten mentality.
If that sounds ominous, it assuredly is, but the crash will come further down the track than the pessimists fear. The numbers being bandies about are breathtaking, but still tiny compared to the wall of money that is poised on the sidelines.
For once the exuberance looks rational: We are not yet in the mad, final stages of a bull market – at least not in equities, though we may be in certain other assets, including property. Stock valuations are still reasonable and the boom in the world economy has plainly got further to run, yet house-price inflation in Britain has outstripped the growth in average earnings for an awfully long time and is clearly unsustainable.
Who knows when the property correction will come, but it now seems certain it will play a major role in the next downturn.
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