Mega merger frenzy evokes 1999 tech boom... and its aftermath?

Jamie McGeever, Reuters

Posted at Jun 21 2018 11:41 AM

The 21st Century Fox logo is displayed outside the News Corporation building in the Manhattan borough of New York City, New York, US, June 15, 2018. Eduardo Munoz, Reuters

LONDON -- By some measures, the global merger and acquisition frenzy has never been greater, fueled by "TMT" mega deals that are drawing comparisons with the late 1990s boom and spectacular bust.

This is understandably unnerving many investors, given how mature the economic cycle and equity bull markets are right now. The US economic expansion is the second longest since World War II, and Wall Street is only 3 months away from its longest bull run ever.

Two mega deals in the US tech, media and telecom space this month worth a combined $150 billion have brought back memories of investors partying like it's 1999. AT&T completed its $85 billion acquisition of Time Warner, and Comcast has offered to buy Twenty-First Century Fox's entertainment and international assets for $65 billion.

AT&T and Comcast are taking on $350 billion of debt between them to finance their deals, making them the two most indebted non-financial, private-sector companies in the world. Just as the U.S. interest rate hiking cycle is in full swing.

The records for economic expansion and market bull run are the 10-year periods ending March 2000, when the Nasdaq bubble started to deflate, and March 2001, the onset of the subsequent recession. There are signs we may be entering similar territory now.

Reuters data show that M&A mega deals this year, up to and including June 15, totaled $1.22 trillion, up 64 percent on the same period last year. They comprised a record 76 deals.

More significantly, that's 52.7 percent of $2.32 trillion total M&A, a new record share for the year to date, and on course to beat the previous calendar year record of 49.5 percent at the height of the tech boom in 1999.

It's a similar picture in the tech, media and telecom (TMT) sector, where mega deals so far this year stand at $401 billion, or nearly two-thirds of the TMT total. That's on track to beat the previous record of 59.2 percent in 1999.

Mega deals are defined as a deal valued at $5 billion or more.

One the one hand, a surge of mega M&A at the tail end of the cycle is to be expected. Companies can't sustain the growth rates of previous years, so executives look to grow by acquisition to keep shareholders happy.

But therein lie the pitfalls, as companies take on greater debt and risk. And some executives simply get sucked in by the whole boom: bigger is better, the good times will go on forever, and this time really is different.

The RBS-led $98 billion takeover of ABN Amro in 2007, Mannesmann's $202 billion takeover of Vodafone in 1999 and Time Warner's $181 billion tie-up with America Online in 2000 are all classic examples of executive hubris, chutzpah and ultimately, folly.

That does not apply to all mega deals, of course, far less the thousands of smaller transactions that are carried out on a more routine basis. But investors looking for warning signs and comparisons with the late '90s don't have far to look.

The Nasdaq continues to boom while the rest of Wall Street is showing signs of burnout. The tech-heavy benchmark is up 12 percent this year, the S&P 500 is up 3 percent and the Dow is flat. The S&P 500 and Dow have failed to revisit their January peaks, but the Nasdaq has made nine record highs since, the last of which was last week.

According to Bank of America Merrill Lynch's monthly survey of global fund managers, the most crowded trade in June was "long FAANG + BAT" for the fifth month in a row. It's the most crowded of any trade since December 2015, BAML said.

The acronyms 'FAANG + BAT' refer to the US tech giants Facebook, Apple, Amazon, Netflix and Google, plus the Chinese firms Baidu, Alibaba and Tencent.

The market cap of the five FAANG stocks currently stands at $3.915 trillion. That's more than the valuation of the entire UK stock market, which today stands at $3.38 trillion.

The US tech sector now has a market cap of $6.6 trillion, according to BAML. That's big enough on its own, but even more staggering in a global context: China's tech sector market cap is $738 billion, Europe's is $533 billion and Japan's is $452 billion.

Parallels with 1999? Maybe. But as some analysts note, total returns on Wall Street today are much lower than they were 20 years ago, valuations still aren't as high, and speculation isn't as intense. The tech industry today is much more mature than it was back then, too.

The mega deal frenzy underway now, however, is more than enough reason for caution.