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Wake Up Call

A few weeks ago, in a presentation given at a conference sponsored by Grant’s Interest Rate Observer, hedge fund investor James Litinsky expressed concern about the troubling similarities between the current wave of large corporate mergers and the 1960s era of corporate conglomerates.

A few weeks ago, in a presentation given at a conference sponsored by Grant’s Interest Rate Observer, hedge fund investor James Litinsky expressed concern about the troubling similarities between the current wave of large corporate mergers and the 1960s era of corporate conglomerates.

A great example is Marriott’s $12.2 billion bid earlier this week to acquire Starwood Hotels & Resorts which is one of the biggest deals since Blackstone Group bought Hilton Worldwide Holdings for $26 billion in 2007, that some expect will spark consolidation in the industry.

The gist of Litinsky’s reasoning is pretty simple and compelling – the same set of fundamental economic factors fueled the merger boom in both cases – a combination of low interest rates, low inflation and muted economic growth, leading to a merger mania as a ready means to satisfy investor appetite for earnings growth.  And just as overreach and the change in economic conditions eventually resulted in a stock price collapse for the earlier generation of large conglomerates, such as AT&T and Textron, the major players in today’s merger market may be left similarly vulnerable to a sudden reversal of fortune.

Already there have been signs of trouble emanating from a few recent large mergers and platform companies, like the huge earnings miss reported by Men’s Wearhouse and the ongoing difficulties at Valeant Pharmaceuticals.  Now combined with the wakeup call from Litinsky’s presentation, the U.S. equity market is confronting the possibility that a similar unraveling may be in store for a number of the contemporary crop of mega-mergers and platform companies, which have been doing so much to fuel stock market growth in recent years.

Facing pressure on a number of economic and regulatory fronts, it seems that stock market investors are increasingly aware of the mounting challenges for large-scale mergers and giant platform companies today.  In just the last three months, what Litinsky identifies as the Platform Index – an index composed of the large public companies that have been hyper-active in the merger market in the last few years – has fallen almost 25% from its peak.  It’s not just market chatter about potential interest rate hikes that seems to be underlying the concern, but a whole host of additional factors, such as heightened political and regulation attention to some of the tactics that platform companies have relied on to enhance earnings, including tax inversions and aggressive price hikes in the pharmaceutical sector.

But what does all this portend in the broader market for mergers and corporate deal making?  Here at BankerBay we continue to see vibrancy in the middle market for corporate mergers and acquisitions being done on a smaller scale.  We hope that whatever headwinds large platform companies may be facing, that private investors will continue to see there’s a wide range of opportunities to pursue, all across the globe, which still make fundamental business sense. BankerBay’s M&A vault currently hosts close to 500 M&A deals from across the globe. These live, verified, institutional quality deals on BankerBay are dynamic and ever increasing, which will offer immense opportunities for cross-border leads to our subscribers.

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