The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 30

The Big Boys Don't Always Buy Cheap

You hear it a lot lately: “Stocks must be cheap. If they weren't, all these raiders wouldn't be taking them over.” If you believe that line—that the recent growth in merger-and-acquisition activity means stocks are a bargain—think again! The big boys don't always buy cheap.

While there are some phenomenal coups, the overall results are mixed. In fact, it seems takeover activity can be a reverse barometer of the market's health. Consider a few phenomenal points. First, these guys were nowhere to be seen back in the mid-1970s when stocks were dirt-cheap. The market sold for seven times earnings and has subsequently skyrocketed. Why hadn't they been buying? Interest rates, believe it or not (see Chart 41), were almost exactly where they are now, so their leveraged deals would have cost no more then than now. But the acquirers didn't acquire then, when stocks were cheap.

If these guys were so smart, why is it that the mega-billion-buck oil takeovers like Getty and Gulf happened when oil prices were sky-high, not before? If these highly debt-financed takeovers were a good deal in the 1983–1984 period, they would have been far better ones in 1978–1979, because they would have benefited from subsequent rising oil prices, profits, and the rapid inflation that would have let them repay their debt in much-depreciated dollars.

The answer, it seems, is that like everyone else, takeover artists chase bull markets. On average, these people are no ...