MIX processed cheese and ketchup and you get revolting gloop. Put two manufacturers that make them (Kraft and Heinz) together and you get a much more efficient company. Or at least that is the theory behind one of the year’s biggest mergers.

Chief executives are dusting off their chequebooks once more. Figures from Dealogic show that global takeover activity in the first quarter reached $889 billion, up 21% from the same period in 2014. It was the strongest first quarter since the financial crisis.

Academic evidence on the benefits of takeovers to the firms doing the acquiring is distinctly mixed, although much of it dates from the 1980s. That never stops chief executives from believing that their proposed deal will be different: like second marriages, mergers are a triumph of hope over experience.

Fashion plays its part. As the chart shows, takeover booms tend to be associated with periods when stockmarkets are doing well, such as the late 1990s or 2006-07. Executives can use their highly valued shares as currency. In the tech sector, the likes of Google and Facebook can scatter their shares like confetti. Equity-based deals are less risky for the predator, which does not have to saddle its balance-sheet with debts that might prove a dangerous burden in the next recession. But today’s very low level of interest rates also makes life easy for private-equity bidders, which rely mainly on debt.

During a merger boom, executives will be besieged by fee-hungry investment bankers eager to suggest plausible deals; the newspapers will be full of speculation about the next bid. A boom can thus create a “get rich or die trying” mentality. Managers reason that, if they are not a predator, they will turn into prey.

Even more cynical explanations are available. Running a bigger company can justify bigger salaries for executives. A study* in the Journal of Banking and Finance last year found that, in cases where the chief executive of the target company was retained after a merger, the acquirer paid a smaller premium to the initial share price than in other takeovers. That suggests executives are trading away shareholder value in return for personal benefits.

There is no sign, in the current boom, of the rise of the kind of acquisition-hungry conglomerates that marked the late 20th century: the likes of ITT, Hanson or Tyco. Indeed, GE, the longest-lasting conglomerate, is shrinking by lopping off its financial arm. Nor are we seeing the kind of cross-industry deal that usually denotes the top of the market, most famously in the case of the AOL-Time Warner merger of 2000. When investors start hearing the word “synergies”, they should head for the exit.

This merger boom seems to be focused more on consolidation within various industries, as with the Heinz/Kraft deal or Nokia’s offer for a rival telecom-equipment maker, Alcatel-Lucent. Such deals have a better chance of succeeding than most: the enlarged company can benefit from economies of scale. But they can also be a sign of an industry that is struggling to create growth: mergers are a way of boosting earnings per share by cutting costs. There were lots of oil mergers in the late 1990s, when the price of crude was low. Now the price has slumped again and Royal Dutch Shell has agreed to buy BG, another oil and gas producer, for £47 billion ($69 billion).

Indeed, companies seem rather pessimistic about their chances of achieving organic growth, as illustrated by their willingness to return cash to shareholders rather than to invest in new factories and equipment. According to S&P Dow Jones Indices, American companies spent $553 billion buying back their shares last year, and $903 billion if dividends are included. The combined figure may top $1 trillion this year. Meanwhile American domestic investment is well below pre-crisis levels as a share of GDP and profits fell last year according to the national accounts.

This cycle can become self-perpetuating, at least for a while. Companies buy back their shares to prop up prices and fend off takeovers. At the same time, the lack of business investment or organic growth makes it more necessary for firms to merge in order to cut costs and boost earnings per share.

The game only stops when the stockmarket declines. But it is hard to envisage a crash when yields on cash and government bonds remain so low, even negative in some cases. Expect the takeover fever to continue.


* “Do target CEOs trade premiums for personal benefits?” by Buhui Qiu, Svetoslav Trapkov and Fadi Yakoub, January 2014