A new report by Credit Suisse discusses the ongoing merger and acquisition wave and how prudent traders can use M&A data and news to earn big profits. In the report, analysts explain the implications of M&A activity, not just for the parties involved, but for the overall stock market.
Analysts believe that the world is still in the upswing of the current global M&A cycle. However, the implications of M&A activity reach far beyond the companies making the moves.
According to the report, M&A activity is a good leading indicator of bull market peaks in the stock market. Cash-financed M&A provides nearly a third of the corporate demand for equities. Once M&A activity reaches its peak, the stock market typically peaks about eight months later.
Is M&A Activity Close To A Peak?
During each of the equity market peaks in 1987, 1990, 1998, 2000 and 2007, the value of M&A activity as a percentage of market cap has been at least 8.4 percent. The current number sits at just 4.6 percent.
Over the past 15 years, buybacks have accounted for about twice as much cash returned to shareholders as acquisitions have, numbers not typically indicative of an M&A peak.
How To Play
According to the report, the prime time to own acquiring companies (not the companies being acquired) is one to three months following the announcement of the deal.
Telecom acquirers have provided the largest returns, whereas consumer staples and utilities acquirers have provided the worst returns.
Materials and IT buyout targets have historically been purchased at the highest premiums. Analysts also note a “curious positive correlation between premium paid and out-performance” in these two sectors.
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