There have been a lot of articles recently saying that M&A is negative for the market. Most cite the AOL/Time Warner merger pretty close to the top of the tech bubble and the LBOs in 2007. Before I refute these arguments, I want to remind readers why I believe cash M&A is bullish.
When a company is bought out for cash shareholders receive cash for their shares. A lot of that cash finds its way back into other stocks. A lot of the cash finds its way into other stocks right after the announcement of the deal as arbitrageurs buy the stock from investors. The balance hits the market at closing.
The AOL/Time Warner merger was an all stock deal. I agree that all stock deals are not bullish as one companies stock is being exchanged for newly created stock of another company. I do not recall much cash merger activity at the top of the tech bubble. Probably because valuations were too high to allow any.
LBOs picked up steam during the 2003-2007 Bull Market. They reached a fever pitch in late 2006 and the first half of 2007 as financing became ridiculously easy. I believe the blow off run in the S&P 500 from around 1225 to 1525 was a direct result of these LBOs. It was the reason the market kept going up until October 2007 even though the credit troubles started a lot sooner and the economy was clearly slowing. It was only when some of the deals started to break that the market picked up steam on the downside as arbitrageurs started dumping shares on the market.
Maybe the LBO activity in 2007 was a sign of the excesses in the credit markets.But while the deals were happening it was extremely bullish for the market. If cash M&A picks up I believe it will be bullish for the market once again.