Thomson-Reuters data shows that merger and acquisition activity rose to $2.4 trillion in 2010. This marks a 23.1% rise over 2009.
Analysis: During the height of the Great Recession (March ’09) I pointed to the rise in merger activity as a sign that important elements of the U.S. economy were acting rationally. That is, they were adhering to the core axioms of financial success.
Financial success always boils down to two axioms:
- Live within your means.
- Buy low, sell high.
The Great Recession was largely triggered by massive abuse of axiom 1. But for those that had spent the preceding years adhering to axiom 1, there was tremendous opportunity to apply axiom 2. Mergers take place because cash rich, resilient businesses, deploy their excess cash to buy great assets on the cheap.
So the fact that merger activity sharply accelerated in 2010 is a very positive sign. For example, it means that businesses are acting rationally. It also means that businesses are more confident, otherwise, why move from the safety of liquidity (i.e. cash) into the risk of illiquidity (the assets of another business)?
Look for more merger activity in 2011 as businesses start to deploy their hoarded cash and as they take advantage of very inexpensive debt financing’s low interest rates.
Importance grade: 6; clearly this is an important statistic. However, it is very backward looking. At the time in ’09 that I pointed out the amount of merger activity taking place this sort of data was a 10. But now, it is just another positive economic statistic.
Jason
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