This August, quite a few takeover lawyers were forced to miss out on their summer vacations -- and deal with the wrath they unquestionably incurred from their angry significant others.
The total global volume of mergers and acquisition (M&A) activity for August now stands at $259.07 billion, the highest in any month since October 2008, according to research firm Dealogic. To date, the year's value of global deals is up 24% from the previous, and up 5% in the U.S., where there's also been a 42% increase in the number of deals.
So why are we seeing such a surge in mergers and acquisitions?
For one, companies are sitting on massive piles of cash. Since they slashed expenses during the recession, companies have been able to operate more efficiently during the recent economic rebound. As a result, companies now have record amounts of cash on their balance sheets.
Since these cash balances don't generate any returns, big corporations are taking over smaller firms in an effort to create profit growth. And with the recent stock market correction, these smaller competitors can be had at bargain-basement prices.
Some investors think that the recent uptick in corporate takeovers is a bullish signal for stock investors.
"I wouldn't say it's a full-blown bullish call, but it's definitely not negative, and it is a sign that there is some value on Wall Street," said Alan Lancz, president of investment advisory firm Alan B. Lancz & Associates, in an interview with The Wall Street Journal. "They are looking at it purely as a numbers game ... the alternative is just so weak."
But if you look beyond the merger mania in the headlines, a gloomier picture emerges.
Think about it: If companies are sitting on so much cash, why aren't they boosting capital expenditures and hiring more workers? Is corporate America really so insecure about the sustainability of the economic rebound that they need to buy other firms to fuel their growth?
Clearly this isn't a sustainable course of action -- corporations can't just keep buying other firms forever.
Not to mention that takeovers tend to be associated with job cuts, which can drag down the overall economy. "Whenever I hear M&A, I also think job loss," said Kim Caughey, senior research analyst at Fort Pitt Capital Group in an interview with Reuters. "In the coming months, given these large acquisitions that we're seeing right now, I wouldn't be surprised to see (unemployment) drift up."
The economic recovery remains on wobbly ground, and the recent surge in M&A might not be enough to energize the bulls. That said, there are opportunities to be had for investors willing to crunch the numbers to try and find the next takeover target. If you're looking for a few ideas, click here to see the option market's favorite takeover targets.
Interactive Chart: Despite the pickup in M&A, the major stock market indices still drifted lower over the last month. Click on the time line to compare the stock market's performance over different time frames:
Kapitall's Eben Esterhuizen, CFA, does not own shares of any companies mentioned. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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