'Stock Markets Contract as M&A Overtakes Equity Sales'

While the contraction of the stock market due to mergers and acquisitions (M&A) isn’t an entirely new phenomenon, it’ll be interesting to see how Canada, the U.S. and Europe are individually affected in '07 by further M&A. The Bloomberg article I excerpt from below doesn’t mention Canada in specific, but I imagine that M&A will have a greater impact on Canadian investors relative to U.S. investors, as Canadian markets are smaller. This article suggests that companies could end up paying too much as the M&A "fad" jacks up prices.

To put things in context, the value of Canadian M&A deals doubled in 2006 to US$173.6 billion (the number of deals increased by 26%) and European country deals went from US$244 to US$266, while US deals went from US$229 to US$266 billion (Japan actually dropped).

Bloomberg, by Michael Tsang and Daniel Hauck (Jan 8) (Full article here)

Stock markets are shrinking as mergers and acquisitions take shares out of public hands faster than companies add them through equity sales. The value of U.S. shares dropped last year by the most since 1984 and the European market narrowed for the first time, according to Citigroup Inc. Last year's $3.68 trillion in takeovers, led by AT&T Inc.'s $86 billion purchase of BellSouth Corp., outweighed the biggest year for initial public offerings since at least 1999.

The contraction may continue in 2007 as dealmaking accelerates. M&A will rise by at least 10 percent this year, analysts at Deutsche Bank AG, JPMorgan Chase & Co. and Bank of America Corp. forecast. Private-equity investors alone have $1.6 trillion to spend, Morgan Stanley estimates.

"Corporations and the private-equity crowd both appear to still be on a buying spree," said Eric Bjorgen at Leuthold Weeden Capital Management in Minneapolis, which oversees $2.8 billion. "Less supply implies higher prices. That's bullish."
The reductions helped lift the Standard and Poor's 500 Index and the Dow Jones Stoxx 600 Index in Europe to the highest in six years. Stock buybacks also climbed to an all-time high. Last week, the S&P 500 fell 0.6 percent to 1409.71 and the Stoxx 600 gained 0.1 percent to 365.69.

Buyout funds and companies may wind up paying too much as they vie over acquisitions. It may "end badly" for stock investors later this year, said Jason Trennert, chief investment strategist at Strategas Research Partners LLC in New York.

Top Priority

"Given the sheer amount of money that's been raised, it seems to me that there's a chance that this could be taken to an extreme," he said. "Fads tend to take on a life of their own."