The mood on Wall Street these waning days of summer has an odd, air-less quality. The markets have had a nice run, at least until recently, buoyed by central bank stimulus and slowly healing developed economies. But for all the high share prices and low bond yields, mergers and acquisitions are again suffering through another down year - a trend that deepened with the financial crisis. Explanations for this now-chronic lack of dealmaking, punctuated by the usual practitioner declarations that it will turn around any day now, are so varied and so speculative that they undermine the belief that "market experts" have a clue about the situation. As a result, markets often appear to be seized by uncertainty, anxiety and angst. Corporate executives lack boldness, deterred by, in roughly chronological order, a biblical plague of fears: of a new crisis, political gridlock, elections, tax increases, President Obama, Greece, Spain, Italy, Cyprus and again the eternally problematic Greece, crumbling BRICs, Obamacare, the debt ceiling, the U.S. credit downgrade and sequestration, shareholder suits and threatening activists, bubble anxieties, fear of Fed activism and high anxiety over Fed tapering.
That's a lot of fears, some of which have come and gone, replenished by new, fresher ones. Meanwhile cash continues to build up on corporate balance sheets - unless it's handed back to shareholders in buybacks or dividends - and companies try to lift share prices with cost cutting, both of which may be, in part, ultimately futile in terms of growth. Some voices declare this the new normal in M&A. But eventually companies will be forced to generate real growth. And to do so they will have to take on the risk to engage in M&A, that is, buy assets rather than grow them. All this will happen next quarter - or next year. Eventually.
Prediction is impossible, of course. Every time someone declares M&A dead, Amgen goes out and spends $10.4 billion for Onyx, as it did in a deal announced Monday. It's easy to see a handful of big deals as a sign of revival; The New York Times does it every few years. Even a few sizable deals are not enough to dispel the funk. How should we interpret this M&A malaise? Some observers argue it's a return to sense and an end to executive overreach. Shareholders, they say, have finally awoken to the fact that many deals fail. There is some truth to this - but it's a simplistic rendering of complex reality. Many deals do fail, some spectacularly. But many others succeed, and the market for corporate control is a mechanism for reshaping companies, for moving assets to more efficient uses and for disciplining managers through the threat of takeover. Historically, the success or failure of M&A seems to swing with the mood of the markets: bull runs tend to loosen M&A disciplines, bearish episodes to restrain excess.
But is something else going on here? I think this M&A malaise reflects deeper uncertainties. We're still suffering fallout from 2008: The economy has not fully recovered; deleveraging by companies, consumers and government continues; new financial regulations remain in flux. Animal spirits, among both investors and executives, remain anemic - despite the plenitude of really cheap debt and rising share prices. But 2008 doesn't fully explain why M&A markets failed to recover even as markets did. The dot com recession was a bubble, after all, albeit not as large as 2008; and M&A bounced back in the '90s after the late '80s recession and scandals. As Paul Krugman points out in Friday's New York Times, we've experienced a series of bubble going back to the S&L crisis of the '80s and through the Asian Crisis and Russian default of 1998 (one could go back further: to the Third World lending debacle of the '80s). All of them saw a brisk return to normalcy in M&A.
What is going on is larger than just M&A. We have lost some faith in markets, and in many of the intellectual rationales and justifications that coalesced so powerfully in the '70s and '80s. That faith has been shaken not only by chronic bubbles, but by regulatory failures and the bewildering complexity of latter-day finance in a networked, interconnected, global system. (We can't even keep exchanges running properly.) The fundamental ideas that supported the market system - that markets were efficient and ruled by rational expectations - have been shaken by failures of market experts and the markets themselves to foresee the crisis, not to say errors on Wall Street. Utility maximizing homo economicus has been shown to be prone to panic, myopia and wayward emotions. And a similar loss of confidence has occurred in the governance model that rules public companies: the belief that shareholders are the ultimate owners of corporations and thus, if only freed to act, would monitor companies in ways that produced optimal results for all. Even faith in M&A has been lost.
We have been, to borrow from Irving Kristol, mugged by reality, producing the unsettling Zeitgeist that rules today. The pillars of orthodoxy have, if not fallen, been severely shaken, but there are as yet no viable replacements. There is no new orthodoxy challenging the market-centric approach, as it battled Keynesianism in the '70s. Complex financial techniques like option-pricing models or so-called general stochastic equilibrium models (don't ask) or value-at-risk models are widely recognized as flawed tools, but there's nothing to replace them. In governance, few really think shareholders make excellent monitors, leaving the task to self-interested activists and governance watchers. But few are about to embrace the pre-'70s stakeholder approach, with its entrenched managers, either. And in M&A, skepticism about large, transformative deals resembles a powerful conventional wisdom, leaving the growth problem to be resolved by other means.
The market itself has grown increasingly suspect. Markets are most efficient as allocators of capital because of their ability to set prices - efficient prices - on asset values. But over the decades, even as volume has mushroomed, the stock markets have grown bipolar: one huge portion increasingly short-term, high-frequency, speculative and often opaque (with trading occurring in dark pools and with complex instruments); the other passively indexed. In both cases, share trading has little to do with the kind of discovery of long-term value Warren Buffett and a handful of acolytes profess, not to say conducive to corporate oversight. Value investing may be socially beneficial as a collective venture and even a kind of capitalistic virtue; it certainly will produce markets informed by a search for value. But it's difficult - and most investors will turn out to be losers, from institutional investors to consumers. Indeed, the gospel of personal investing, not without reason, is to index, reducing fees. On the other side, the gospel of the high-fliers is high-frequency trading, in which algorithms shape rapid trading based on fleeting price fluctuations and patterns that have little or nothing to do with value. There is something self-fulfilling in this bipolarity. Without faith in value, why not gamble or grab a free ride?
That's where we are today. The markets often appear complex, treacherous and suspect as efficient machines for discovering value. The mechanism of efficiency, in any event, is more mysterious than ever. And yet this is the only option we have. Share prices continue to determine corporate success or failure, not to say pay. Consumers must invest or end up impoverished. Bretton Woods and the gold standard are relics and there is apparently no other option in Europe beyond the euro. We move forward in a world we can no longer quite believe in, refusing to look down.