By Lauren Hirsch and Noel Randewich
(Reuters) - The record dealmaking volume for October did not create a ripple effect lifting U.S. stocks as it has in the past – partly because the mergers, albeit large, were few and far between, bankers and analysts said.
Though acquisitive corporate bosses generated $329 billion worth of takeovers in October, the biggest month for U.S. M&A on record, according to Thomson Reuters data, the 615 deals that were announced marked the lowest number of monthly deals since March, 2013. The top four deals alone represented over one half the month's total.
The sparsity of deals indicates that while confidence may be running high in board rooms at a handful of large companies, it is not necessarily widespread across corporate America. As such, the stock market's 1.9 percent drop in October, as measured by the S&P 500 index, was more of a thud than a rallying roar.
"It should be bullish, because it's a sign that companies see value in other companies, but it hasn't helped," said Donald Selkin, chief market strategist at National Securities in New York. "People feel that there's not as much value in these stocks as there might have been."
The deals also lack a common or new motivation that would inspire investors to gobble up stocks in anticipation of more mergers, bankers said.
While there is some ambition to get transactions done before the U.S. Federal Reserve makes financing more expensive by raising interest rates, people involved with M&A say that was not a primary factor in October. The presidential election, just over a week away, also did not appear to be a driver.
But the autumn merger boom does reflect a less alluring reality: the summer was uncertain as CEOs put off deals they might have done sooner.
Third-quarter M&A in the U.S. accounted for just 24 percent of total year-to-date M&A, the lowest percentage since 2007.
Britain's Brexit vote in June to leave the European Union kicked off a spate of market volatility. Although Brexit fueled some deals in October because the British pound had lost so much value, it stymied activity until recently.
"In the summer, the dealmakers in the U.S. took a collective breather," said John Reiss, global head of M&A at law firm White & Case.
DEALS ACROSS THE BOARD
October's megadeals were spread out among many sectors.
The biggest for the month, as well as 2016 to date, was telecom giant AT&T (NYSE:T) Inc's proposed $85.4 billion acquisition of content creator Time Warner Inc (NYSE:TWX). Qualcomm's $38 billion purchase of NXP Semiconductors NV (NASDAQ:NXPI) also set a record for the semiconductor sector.
There were also large deals announced between cigarette makers, asset managers, and oil-and-gas producers. Healthcare stood out as a sector without big deals.
All told, there were 10 deals larger than $5 billion in October, and the average deal size was $535 million – the highest since July 2015, when it was $329 million.
Bankers, lawyers and executives involved with the October flurry described a range of rationales.
For instance, British American Tobacco's $47 billion offer to buy U.S. tobacco firm Reynolds American Inc (NYSE:RAI) was driven by the drop in sterling. General Electric (NYSE:GE) Co's decision to merge its oil and gas business with Baker Hughes Inc reflects its ongoing divestiture of peripheral businesses.
And while the AT&T-Time Warner tie-up happened in October, it was driven by a years-long disruption in technology, media and telecom businesses that has led those types of companies to combine.
"At the end of the summer, there were a lot of things going on in the world: there was discussion around interest rates, concern over Brexit, uncertainty over where the economy was headed," said Steve Arcano, who concentrates on M&A as a partner at law firm Skadden, Arps, Slate, Meagher & Flom.
"My sense is that over the course of September people felt they had a better read on all of that, reengaged and started pushing forward again."