Mergers & acquisitions: signs of a strengthening economy: the merger trend is a great signal for economic expansion.

Author:Hobson, Mellody
Position:TOTAL RETURN
 
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SINCE THE END OF THE GREAT RECESSION, PROFESSIONAL investors have waited for an inevitable wave of mergers and acquisitions. Even though the financial foundation seemed ready long ago, the delay took years. Now, after a glacial M&A pace from 2011 to 2013, the flurry of dealmaking activity is hard to miss. Transactions in the media, healthcare, and technology sectors seem to garner headlines every day. Given the long lull, the action may feel a bit frenzied to some. The Wall Street Journal recently reported: "Global takeover activity has climbed 53% since the beginning of the year, compared with the same period last year." More specifically, the article notes, "Unsolicited bids, at $444 billion this year, are at their highest point at this point in the year since Dealogic began keeping records in 1995."

The drivers of the spate of combinations are easy to decipher--from cheap debt financing, to high corporate cash levels, to strong stock prices as currency, to low market volatility, to the return of the hostile takeover. Not to mention that these days acquirers' shares continue to buck the trend and actually rise on the news. Add to that a growing economy, a stock market at record highs (but with historically normal valuations), and a hospitable regulatory environment, and you have ripe conditions for deal mania.

We have seen virtually every flavor of deal. Recently, the No. 2 and No. 3 dollar stores, Dollar Tree and Family Dollar, decided to join forces. It's an old standby--smaller players uniting to take on the industry leader, which in this case is Dollar General. Dollar General boasts $18 billion in annual sales from its 11,000 stores. After the merger, Dollar Tree (the acquirer) expects to achieve a similar $18 billion in sales from nearly 13,000 stores. Household-name giants are also scooping up smaller, niche players, especially in the areas of media and technology. Probably the most celebrated such deal was Facebook's $16 billion acquisition of WhatsApp. WhatsApp may not be a familiar brand in the U.S., but it dominates electronic messaging globally...

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