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The New York Times is hailing a new era of aggressive merger and acquisition activity spurred by record low bond rates. The defining characteristic of the major deals so far, however, has been defensiveness – an attempt to adjust to unfavourable investing conditions. A flurry of big deals has historically been an optimistic sign for investors but this time, it appears to be cause for concern.
The American Airlines merger with US Airways was a textbook case of reducing oversupply. For years, all of the U.S. airlines have been either in some stage of bankruptcy, or barely avoiding it. Too many seats have been available for too few passengers, forcing prices down even as fuel costs have climbed. The merger is designed to contract the supply of flights in an attempt to restore pricing power.
The Michael Dell-led attempt to wrest his company from shareholders is similar to taking a used car to the garage to be overhauled. Dell Inc continues to generate cash flow but the stock has flatlined as the growth of the PC market has slowed. Industry experts expect that once taken private, the company will be completely restructured and emerge as a dominant player in cloud computing. This smacks less of optimism than desperation.
Like most watchers, we were initially blinded by the eminence of Warren Buffett when the H.J. Heinz news broke. As details emerged, however, it was clear that Mr. Buffett was primarily playing the role of financier for Brazil-based venture capital firm 3G Capital, who would run the company while Berkshire Hathaway collected a nine per cent coupon on preferred shares. 3G Capital may be optimistic about the future of Heinz, but Mr. Buffett had merely found a way to generate a nine per cent annual return when bond yields are seven per cent lower.
All three of these deals are reactionary. They aren't attempts to invest in a bright future, but are instead designed to deal with existing problems: Oversupply for the airlines; technological change that has outpaced Dell; and low risk-free returns on Warren Buffett's giant, Scrooge McDuck-like pile of cash. These are not investments in growth, they're responses to an economy that continues to be sluggish.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow