At $85 billion, AT&T’s bid for Time Warner would result in the sixth-largest merger of all time. That’s a big deal. But is it also a signal that the stock market has reached its top?
Big mergers do tend to occur around peaks in the stock market, for a variety of reasons. Mergers make the most sense when companies’ ability to grow organically has leveled off. Unable to expand the business from within, companies try to grow by acquisition instead. Mergers also offer opportunities for financial engineering that can boost the bottom line as well as the top line. Given the costs and risks of a merger or acquisition, it’s not a popular strategy when a business is growing, but it can be attractive when that growth slows.
History confirms that the largest mergers often come when the market is topping out. Of the 15 biggest mergers in history (not including this one), 9 of them, or 60%, took place in the period between 1998 and 2001. Three happened between 2003 and 2006. Only three occurred in non-bubble environments. Clearly, there is a suggestion that high stock prices at market tops drive mega-mergers.