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M&A premiums up despite slowdown

Buyers are paying more than ever to shareholders to acquire companies, even as the M&A market remains slow.

This is the intriguing contradiction in new May 2008 data from Thomson Reuters.

So far this year, “financial sponsors and strategic acquirers” worldwide have paid an average of 25% above the publicly traded share price four weeks prior to a deal announcement. That’s the highest M&A premium since 2002.

Yet, at the same time, M&A activity is down 45.5% from the same period a year ago.

In markets — equities and real estate for example — prices are supposed to adjust to the laws of supply and demand. If there are fewer buyers competing over the same assets, why are they agreeing to pay even more?

The answer is that in the M&A market, fundamentals matter. Stock prices may have fallen in the past several months, but many companies’ profits remain strong. In fact, the same report from Thomson Reuters points out that the average price-to-earnings (P/E) ratio “is expected to hit its lowest level in a decade, signaling possible buying opportunities as market conditions improve.”

The slowdown in the M&A market is a bearish indicator. But rising M&A premiums are a sign that acquirers still see a lot of value in the current stock market.

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