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From Justin Brill, editor, The Stansberry Digest: In the months before a U.S. presidential election, corporate merger and acquisition (“M&A”) activity usually slows to a standstill. And for good reason… A new president can make dramatic changes to antitrust regulations and other policies, which can derail agreements and cost companies millions of dollars in lost fees.
But that has not been the case this year…
In total, the Wall Street Journal reports U.S. companies have made an incredible $248.9 billion in deals so far this month. This is the most M&A activity in a single month in history… and well above the previous record of $240 billion in July 2015.
Even more impressive, an all-time record $177 billion of this total came in the last week alone… including AT&T's (T) $85 billion deal to take over Time Warner (TWX), British American Tobacco’s (BTI) deal to buy Reynolds American (RAI) for $47 billion, and perhaps most notably, Qualcomm’s (QCOM) agreement to buy NXP Semiconductors (NXPI) for $47 billion in the second-largest pure technology deal in history. (More on this in a moment.)
Incredibly, there could be even more on the way…
This week, we learned business-telecom companies CenturyLink (CTL) and L-3 Communications (LLL) were in “advanced talks” regarding a $30 billion merger. General Electric (GE) is also reportedly considering a similar-sized deal to merge its oil-and-gas business with oil-services provider Baker Hughes (BHI).
Analysts note the frenzy is especially surprising in light of the government’s growing “war” on business. The U.S. Department of Justice has already moved to block several deals this year.
So what is driving this frenzy? The answer should sound familiar to regular Digest readers. As the Journal reported this morning…
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With sales growth hard to come by in a slow economy, companies are casting about for ways to cut costs and keep profit growing. But after years of belt-tightening they need new sources of efficiency, such as a merger with a rival. Many are also looking to deploy their cash hoards in ways that will ensure future growth after spending years aggressively buying back stock. And investors are egging them on. Like with the potential telecom deal, shareholders of both Qualcomm and NXP cheered their union, driving up both companies’ stocks sharply. |
In other words, companies are likely turning to M&A for much the same reason they've been buying back boatloads of their own shares… As the real sales and earnings growth has declined along with the economy, many companies are becoming desperate to boost earnings any way they can.
History says this will not end well…
Unfortunately, these moves have come at a serious cost… U.S. companies are as heavily indebted as they've ever been. As Porter explained in the September 30 Digest…
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Of greatest concern to me is the overall level of corporate debt. Corporate debt in the U.S. has consistently topped out at a little less than 45% of GDP. Historically, the debt cycle has turned at that point. Defaults rise, issuance declines, and a bear market begins. Today, that level sits at 45.4%… |
And yet, while defaults are already quietly marching higher… companies continue to borrow more while shareholders cheer.
Reckless behavior like this is a familiar and unmistakable sign that precedes every major market top. This boom may not end tomorrow, but it will end… and history suggests it will not end well.
Reeves’ Note: The global scale of these problems means the coming crisis—what Stansberry Research founder Porter Stansberry has called “the greatest legal transfer of wealth in history”—will be historic.
Porter says this crisis will create the ultimate Big Trade opportunity for certain investors. He’s hosting a live presentation on Wednesday, November 16 at 8 p.m. Eastern time, to explain it all. Click here to reserve your spot.