Red Alert! Recession and Corporate Mergers.

From Bloomberg, we read this:

Forget merger Monday: October as a whole was a record month for dealmaking, with almost half a trillion dollars of mergers and acquisitions announced globally.

CenturyLink Inc.’s $34 billion acquisition of Level 3 Communications Inc., as well as General Electric Co.’s deal to combine its oil and gas division with Baker Hughes Inc., pushed October’s deal volumes to about $489 billion, according to data compiled by Bloomberg. That’s the highest amount for at least 12 years, topping the previous record of $471 billion in April 2007, the data show.

The visual depiction is below:

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Note the timing of the previous high in 2007: just before the financial crash of 2008. A huge uptick in mergers and acquisitions is common near the end of a boom and just before a crash:

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Notice the highs in 1989, 2000, and 2007: all within a year immediately preceding a recession.

Why does this happen? A desperate search for revenue as the boom winds down:

Many companies have taken on debt in order to fund mergers and in effect “purchase revenue streams,” the report noted. Cheap debt has enabled firms to complete some of the biggest debt financed acquisitions ever, such as Anheuser-Busch Inbev SA’s $108 billion takeover of SABMiller PLC and Dell Inc.’s $67 billion purchase of EMC Corp.

“Organic revenue growth has been a challenge through this recovery,” Tesher said, adding that other revenue-boosting moves like cost-cutting have largely been exhausted. “What we’ve seen is some companies were turning to M&A, strategic M&A in particular, to effectively continue their revenue growth.”

Smart money would pay cash. Idiot money buys on debt. And corporate debt is sky-high:

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This is a problem. Corporations are leveraged to the hilt. This means they are heavily exposed to downgrades and defaults. As of right now, corporations are even more highly leveraged than they were in 2008. Some people just never learn.

This is all a common sign of impending recession and a Federal Reserve-driven boom that is reaching it’s peak. Think of it this way: The Federal Reserve keeps the liquor flowing – cheap debt –  and the big corporations drink it up wildly. They drink until they are totally plastered. Eventually, they can’t even stand. They can only stagger out of the bar by leaning up haphazardly against each other. Consider this “the merger”. But two drunks leaning together are simply twice as drunk, collectively. When they collapse on top of each other, it will hurt more. And the mess will be bigger.

When interest rates are low, corporations that lack innovation like to borrow money by issuing low-yield bonds and buying other corporations that will supposedly bring in lots of revenue. It looks great on paper in the short term. But nobody seems to wonder why a company is for sale at this point in the boom. Large companies that are innovative and successful do not go up for sale. A company goes up for sale when the owners want to get rid of it, usually for specific reasons. One lukewarm firm buying another lukewarm firm solves nothing.

When recession strikes, there is going to be a bloodbath among the bloated corporations who spent the past few years on mergers and acquisitions.

CONCLUSION

There have been an increasing number of warning signs over the past year which point to recession. I have discussed them here and here. At the time, I referred to these as yellow alerts. I am officially sounding the alarm for red alert. I predict the beginning of a severe recession in the coming year. I do not have exact timing: month or season. I am uncertain of the precise trigger. But the economic gun is loaded and the safety is off; all that awaits is a pulling of the trigger.

If there is an economic recession, what is your plan? How will you deal with it? It may be worse than what happened in 2008. Everyone should have some kind of plan for this.

I am not qualified to give anyone personal financial advice, so don’t ask me. But I will share my personal strategy: First, save sufficient cash (physical or digital) to pay for at least 1 year’s worth of bills in case of unemployment. Second, avoid unemployment at all costs. This is done by becoming as valuable to my employer as possible. This means being a reliable employee, being willing to perform grunt work, and finding new ways to provide value. These may sound like truisms to you, but you’d be shocked at how many people have almost zero cash in savings and don’t give a damn at work. It isn’t difficult to set yourself from 80% of your peers.

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