By Alexandra Kaiser, guest blogger, Kent Place School alumna and undergraduate at New York University
I have been reading many news articles on recent mergers and acquisitions. 2013 started off with companies spending $219 billion on M&A. Compared to the $85 billion they spent in the same period last year, this is $134 billion more! There was the announcement of American Airlines and US Airways merging. Also, 3G Capital and Warren Buffett’s Berkshire Hathaway said they would acquire H.J. Heinz. (more below)
Is this sharp increase in M&A spending a good sign for the economy?
Yes, M&A activity is a good sign for the economy:
- One main factor behind more mergers and acquisitions is the strength of the stock market. Reflected by a Dow near its 2007 historic high, nowadays, the stock market is in a better place since the financial crisis. With higher share prices creating an incentive for company heads to expand and take more risks, a merger or acquisition can add to a company’s financial strength. For the OfficeMax and Office Depot merger, together, they would have had combined revenue of around $18 billion last year and now, they can cut costs.
No, M&A activity is not a good sign for the economy:
- There is a risk that more mergers and acquisitions will lead to layoffs, less competition and more monopolies. I was reading one article that mentioned how it is expected that OfficeMax and Office Depot will close stores that are located within the same area. Logical in terms of efficiency, it also means that workers in closed stores will lose their jobs. In addition, prices could rise because OfficeMax and Office Depot are no longer competing.
In my view, the good aspects of mergers and acquisitions outweigh the bad ones. With more money once again available from banks, this merger and acquisition activity can flush cash into the market, give companies financial strength and increase stock values.
Examples of 2013 M&A activity:
- Buffett Heinz Deal ($23 billion)
- American Airlines/US Airways ($11 billion)
- Dell’s Leveraged Buyout ($24 billion)
- Comcast/NBCUniversal ($16.7 billion)
- Liberty Global/Virgin Media ($16 billion)
Sources and Resources: This Time article and this NY Times article stood out because they brought up the question of whether or not the increase in M&A activity is actually a good sign for the economy. More specific, here and here and here are articles with helpful examples.