I feel very fortunate to possess a collection of cartoons from Puck, the humor magazine that ceased publication in 1918.

My favorite is a 1901 cartoon by famed illustrator Joseph Keppler depicting industrialist J.P. Morgan blowing bubbles with his pipe. The cartoon’s caption is “Wall Street Bubbles, always the same — Inflated values.” Morgan created the first $1 billion company, merging several major steel companies to create U.S. Steel in 1901.

As reported in The Wall Street Journal and elsewhere, October was the biggest ever month for mergers and acquisitions as U.S. companies agreed to $250 billion in consolidation deals.

This frenetic merger activity is occurring at a time when some analysts feel that the stock market is in the late stages of a bull market, in part because of the Federal Reserve’s policy of keeping interest rates low.

Stocks overvalued?

“Here’s how you know the stock market is hugely overvalued,” Mark Hulbert offered on Market Watch:

  • The price/book ratio is 2.8 to 1, which is quite high historically.
  • The price/sales ratio is 1.9 to 1, which is almost unprecedented.
  • The dividend yield is 2.1 percent for the S&P 500. For most of the time since J.P. Morgan’s day, stocks have yielded more than that.
  • The current P/E ratio of 25.2 to 1 is higher than 89 percent of past bull market peaks.

Merger examples

The following are examples of the size and variety of mergers in 2016:

  • AT&T offered to acquire Time Warner for more than $86 billion.
  • Abbott Laboratories hopes to acquire St. Jude Medical for $30 billion. These are two large medical device companies.
  • Microsoft Corp agreed to buy LinkedIn for $26 billion. Microsoft hopes to integrate LinkedIn’s networking and customer relationship management capabilities with Microsoft’s cloud capabilities.

Merger motives

Why are companies anxious to grow through acquisitions?

  • Corporations want to enter new lines of businesses and/or to expand their customer reach.
  • Companies view acquisitions as a way to overcome sluggish sales and increase profits.
  • Companies’ large cash hoards earning near zero and the availability of credit at low interest rates make it cheaper to make acquisitions. Stated differently, in our current rate environment, almost every acquisition boosts earnings.

These conditions have existed, to one degree or another, for years. But October 2016 is special because it’s the last month before presidential elections, and both parties have indicated opposition to big mergers and acquisitions.

Sens. Mike Lee, R-Utah, and Amy Klobuchar, D–Minn., the chair and the ranking member of the Senate Judiciary Subcommittee, issued a terse joint statement on Oct. 23 declaring “An acquisition of Time Warner by AT&T would potentially raise significant antitrust issues, which the subcommittee would carefully examine.”

Merger killers

The government has already taken the regulatory steps and legal action to terminate major mergers. Some examples:

  • The Obama administration altered its rules on tax inversions to prevent Pfizer’s $150 billion purchase of Allergan PLC. Tax-inversions occur when companies move their residence outside of the United States by purchasing overseas companies in countries where taxes are lower.
  • The government successfully opposed the tie-up of Bakers Hughes and Halliburton, arguing that the combined companies would enjoy an outsized market share in the oil-service sector.
  • The government successfully challenged the merger plans of two major health insurers, saying the deal would shrink the top five players in the industry to three.

It’s hard to believe that J.P. Morgan attracted national attention more than 100 years ago for putting together the first $1 billion corporation. Within a few years, we will see trillion-dollar companies — 1,000 times bigger.

Remember the words of Joseph Keppler’s cartoon, “Wall Street Bubbles, always the same — Inflated values.”

Originally published in the Sarasota Herald-Tribune