After years of poor financial and economic news, there's an understandable tendency to infer a trend—a resurgence, a boom, a mania—from a small number of events. Just as a single off-the-charts quarter of growth inspired hosannas ("Bush Boom," today's New York Post front page rages, "Economy in Historic Rebound"), the announcement of several mergers at the beginning of this week was fuel for optimism. These deals supposedly signal business confidence, which signals a boisterous economy. "This week's sudden spate of large-dollar mergers is worth noting for what it says about a welcome return of animal spirits," said the Wall Street Journal.
The Journal was borrowing a great phrase of John Maynard Keynes. "Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities," he wrote in The General Theory of Employment, Interest and Money. (Perhaps fittingly, you can read the whole book for free at this Marxist site.) In other words, stock markets need occasional doses of irrational exuberance.
Last Monday's tally of mergers was indeed impressive—Bank of America offered to buy Fleet Boston for $48 billion. Health insurance firms Anthem and WellPoint Health sealed a $16.4 billion deal. United Health Group bought MidAtlantic Medical Services for $3 billion. But declaring merger mania and a return to speculative enthusiasm now is a little like declaring the winner of this Sunday's New York Marathon at the second mile. "My observation is that it's less of a resurgence of M&A and more of a pendulum swinging back to a normal level," says Richard Peterson of Thomson Financial, which tracks mergers and acquisition data assiduously.
The rash of deals helped push the year-to-date volume of mergers and acquisitions to $405 billion. That is certainly better than last year, when animal spirits were caged. (Through October 2002, deals totaled $360 billion; they finished the year at $432 billion.) But by recent historical standards, M&A is still in the doldrums. In 2000, when animal spirits rampaged like a tiger at the Siegfried and Roy show, mergers totaled $1.7 trillion—a reflection of frenzied deal-making and absurdly high asset prices. In 2001, $756 billion in deals were sealed. Back in 1994 and 1995, when the Dow ranged between 4,000 and 5,000 and the economy was far smaller than it is today, mergers were about $335 and $504 billion, respectively. In other words, as measured as a percentage of stock-market capitalization, or Gross National Product, mergers are still pretty depressed.
Given the economic conditions, you'd expect that mergers and acquisitions would be proceeding much more rapidly this year. Today's higher stock prices mean companies have a newly inflated currency with which to go shopping. Meanwhile, interest rates are near historic lows (and far lower than they were in the early 1990s), which means it is comparatively cheap to borrow cash to buy companies. One of the reasons interest rates may be so low is that they're not determined just by the Federal Reserve Board, they're also determined by market demand. If lots of people wanted to borrow money to expand, to buy other companies, and to invest, interest rates would be expected to rise. Unless the recent deals kick off a merger surge, the market's animal spirits will remain more petting zoo than wild kingdom.