Warren Buffett and his Omaha, Nebraska-based conglomerate Berkshire Hathaway will buy the manufacturing supplier Precision Castparts Corp., which makes the metal pieces that go into turbines and aircraft engines. Price tag: $32 billion.
It’s Berkshire’s biggest deal to date, and it comes during a very busy year for mergers and acquisitions.
“By the time the dust settles, it may even be the largest ever,” says Anant Sundaram, professor of finance at the Tuck School of Business at Dartmouth.
There are a few reasons for all the merger and acquisition mania, and they all help paint a picture of what’s happening in corporate America.
First, firms often borrow money to help them buy other companies, and interest rates have been and remain very low.
“Now the CEO’s of some of these acquirers are starting to look at the Federal Reserve and say, ‘You know what, the end is in sight,’” says David Nelson, chief strategist at Belpointe. “It’s likely that over the next couple years, interest rates are going to climb…. The era of cheap money may start to go away, and it’s going to be far more difficult for these firms to get these deals done. So they’re doing them now.”
Second, global growth is tepid, especially for firms with a lot of exposure to a slowing China, for example.
“Growth is harder to come by,” explains Bill Caffee, partner at White Summers Caffee James in Portland, Oregon. “It is easier to buy growth than it is to create it, and mergers and acquisition is one typical way. It’s easier to get economies of scale, you can get more bargaining power, costs go down and market share goes up.”
A lot of this is industry specific, says Caffee — some industries are undergoing significant disruption, and consolidation is being driven by competition. But on the whole, it may signify that many firms expect low growth in the near future.
Third, many companies have large piles of cash they’ve accumulated. And their shares are highly valued. CEO’s say to themselves “I feel wealthy so I’ll go shopping for big-ticket items,” Sundaram says. The flipside, he adds, is that if everyone’s shares are highly valued, there’s a risk you’re overpaying for whatever company is being purchased.
Finally, there’s a somewhat psychological reason, says Sundaram. “There’s a lot of what we call looking-over-the-shoulder kind of behavior amongst CFOs and CEOs. In other words, herding behavior.” Should decisions go wrong, “it’s easier to fail in a crowd than it is to fail alone.”