What does all the M&A Activity Mean for the Future of the Market?

Brittney Barrett |

Yesterday, Microsoft (NASDAQ: MSFT) announced that it would be purchasing online call company, Skype for a sum of $8.5 billion. The statement seemed to be the latest in a flurry of mergers from major Blue Chips for the year, but similar to the backlash the deal has received, the increased M&A activity may not bode well for the future. The rise in activity may be one of the latest signs, besides the decline in the commodities market and China’s interest rate hike, that the market may be preparing for a summer selloff. To many, or at least the head of Microsoft, the Skype deal seemed like a good idea. To analysts, it seems like the company throwing some extra liquidity around in order to assert itself. Microsoft; however, isn’t alone in making major deals lately. Johnson & Johnson (NASDAQ: JNJ) also purchased Swiss medical device maker, Synthes, in the most expensive deal of their company history.

The successful earnings season and health of the market,( it reached its highest peaks in years recently), has led companies to use excess liquidity to buy up other companies. This isn’t a new trend. M&A booms were observed in 1998 and 1999 as well as in 2007, right before the market crashed.  The M&A may signify a health market but the fact that the money is going into acquiring risky assets, like Skype for instance, is the problem.

These acquisitions could be problematic in later quarters. During the early weeks of 2011 alone, there were a total of $351.6 billion spent on acquisitions, an 80% hike from a year earlier. The trend has continued to gain steam as the year has marched on. The worry is that companies are buying out other companies in order to capitalize or because competitors are growing stronger could be potentially dangerous.

The same goes for the flurry of IPOs coming out of Silicon Valley. The IPOs are initially met with enthusiasm, but with sky-high valuations have led many are expecting a second internet bubble. Even behemoth-social network Facebook, currently valued at $50 billion, is having the 1 percent of its shares available to Goldman Sachs sold quickly to the public by the investment bank. Essentially, there is a lot of risky activity going on. After a long depression, many companies and venture capitalist firms are anxious to go full speed ahead. It’s like going for a jog after not working out for a long time. It’s easy to start out fast, but there’s a possibility that the steam will run out before making it home.

 

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