The global boom in mergers and acquisitions, while fun now, could lead to some financial trouble down the road, suggests National Bank Financial.

In a research note, NBF points out that just four and a half months into 2007 the total number of announced M&A deals is over US$2 trillion, which is already 57% of last year’s record US$3.5 trillion in deals.

This action is obviously boosting equity markets, it notes, as over the past 10 years, the average premium on announced deals has been 25.5%. “Moreover, takeovers leave portfolio managers with fewer blue-chip companies in which to reinvest the proceeds when they sell shares of acquisition targets. This further boosts equities indexes.”

However, it also warns that there could be the seeds of some trouble for both the companies involved in all this activity, and the financial firms that have been helping them along. “As is the case with many things, taken to excess they do more harm than good. When the dust settles, the current M&A boom may turn out to be a like credit card shopping spree: instantaneous gratification, but financial stresses down the road,” it warns.

“The current preferred payment method for takeovers is all-cash offers. This implies that the majority of large cash-only acquisitions are financed on credit, since few companies keep tens of billions of dollars in their war-chests,” NBF says. “The repercussions of this are that the purchasers end up with more liabilities on their balanced sheets. This could also put stresses on the financial industry if the economy slows down.”

NBF suggests that the financial impact from a market downturn could be larger this time around than it was in 2000. “When the bubble burst last time, banks and financial institutions were relatively unscathed: they did not finance the tech bubble. Today, banks are lending to companies on a shopping spree,” it says.

“We would advise caution. The upward pressure on stock prices resulting from M&A speculation could all but vanish if equities markets start to pull back in response to earnings pressure. In the last equity market trough, in 2002, M&A activity fell sharply,” it concludes.