Intel is buying chip maker Altera.
Charter is buying Time
Warner Cable. All the big drug makers are buying all
the mediums-sized ones.
Great news, right? If these huge companies with their top-of-the-line analytical
tools and deep insight into their markets think paying way up to build empires
is wise, then the stock market, far from being overvalued, must be cheap.
Right. Except that history says the opposite. One of the best signals that
a bubble is about to burst is rich people with too much money doing stupid
things. And as Mitt Romney likes to say, corporations are people too -- which
means they're prone to exactly this kind of herd behavior.
For proof of this you need only recall the last bubble, when household name
companies were buying out their peers with abandon (i.e., with hundreds of
billions of dollars of other people's money). Giants like Amro Holding NV,
Equity Office Properties, and Alcan Aluminum, among many, many others were
all merged into global multinationals at prices that seemed to imply blindingly-bright
futures for their industries. (A complete, shockingly-long list of the acquisitions
attempted and/or completed in 2007 is available here.)
As it turned out, these were terrible deals for everyone except the CEOs of
the takeover targets, who got to leave at the top. And 2007 was par for the
course; the same thing happened at the peak of the tech stock and junk bond
bubbles. Seen through this historical lens, today's orgy of takeovers at record-high
prices implies at least two things:
-
Corporations have copious free cash, due mostly to their ability to borrow
at historically low interest rates, but relatively few opportunities to
build value by turning that cash into new factories. So instead they choose
to "rationalize" their industries by buying up the competition, closing
redundant factories, laying off unneeded workers and hoping that the sum
ends up being more valuable than the parts. The immediate result, however,
is fewer workers with good jobs, lower growth for the economy as a whole,
and therefore falling sales for those newly-rationalized industries.
-
Corporate CEOs are tired of the drudgery of actually running a business
and have grown cocky after years of rising share prices. Combine these
two attitudes with the afore-mentioned easy money and you get empire building.
In other words, today's buyers are thinking mainly about future cocktail
parties and industry conventions where they'll be treated like royalty.
Shareholder value is taken for granted (because stock prices always go
up, right?). The inevitable result is a string of deals done at prices
that look insanely inflated a few years hence.
So is this 2007 (or 1999 or 1988) all over again? That won't be clear until
the cycle turns, but if this isn't 2007, it's damn close.
