A rise in M&A activity may seem like a indication of a stronger economy, but what if it’s not, asks the New York Times.
U.S. M&A activity is up almost 50% from last year, hitting $775.8 billion thus far. And more deals are on the table, including Charter Communication’s $55 billion purchase of Time Warner Cable. But it appears some of the consolidation is coming from slowed company growth, rather than enthusiasm in a recovering economy.
Revenue growth for U.S. companies has declined to about 5% from 11.2% in 2010, according to a report from Citigroup. Citigroup’s advice to businesses was to start looking for “inorganic growth to meet analyst revenue projections.” But many deals, including the Charter purchase of TWC, don’t even bother mentioning revenue projections because they’re likely to be slim.
In a letter to clients referenced by the Times, Goldman Sachs chief U.S. equity strategist David Kostin says that managers are often poor market timers when it comes to planning stock buy backs. “Firms should focus on M&A rather than pursue buybacks at a time when P/E multiples are so high,” he writes.