The recent announcement that telecommunications firm AT&T Inc. (NYSE:T) has entered into a definitive agreement to acquire media and entertainment company Time Warner Inc. (NYSE:TWX) in a transaction valued at $108.1 billion, with the assumption of debt, on October 22, 2016 ranks as the third-largest ever announced U.S. M&A transaction and has propelled U.S. M&A activity for the month of October 2016 to date to over $249 billion.
This deal surge has renewed concern among some market observers that equity markets may be approaching a near-term peak. In this regard, we sought to examine the performance of the S&P 500 in the one-year period following the announcement of some of the leading U.S. M&A announcements to determine whether a relationship exists between big M&A deals and subsequent market performance.
As indicated below, our review of the performance of the S&P 500 in the one-year post announcement period of large U.S. M&A deals generally finds a positive bias. Of the ten largest previously announced deals which had more than a one-year period from their announcement date, in seven occurrences the S&P 500 gained while in three instances the index retreated in the one-year period following the deal announcement. The strongest advance occurred in the one-year period following Pfizer’s $79.5 billion purchase of Wyeth Inc. in January 1999, whereupon the S&P 500 posted a better than 30% advance in the following one-year period.
Conversely, in the aftermath of the biggest-ever U.S. M&A deal, America Online’s $164.7 billion acquisition of Time Warner Inc., the S&P 500 dropped 9.9% in the subsequent one-year period following that deal’s announcement. On average, we find that the S&P 500 has been associated with a 9.16% gain in the one-year period following the ten largest ever U.S. M&A transactions. In the most recent episode of market activity following a big M&A deal, in the one-year period following Denali Holding’s $75.7 billion purchase of EMC Corporation in October 2015, the S&P 500 has posted a gain of 6.0%.
While the general direction of equity markets is influenced in part by the growth of corporate earnings and the strength of underlying economic conditions, the occurrence of large M&A transactions is viewed in some quarters as a harbinger of financial strength, given that big deals are often associated with a favorable lending environment and confidence among corporate management. To that end, the positive performance of the broader equity markets in the one-year period following some of the biggest M&A deals should come as of little surprise.