By Laura Mandaro
Plenty of cash and looser credit should drive more mergers, a
climate analysts called "encouraging" for the market even though
the latest big deal failed to turn stocks broadly higher
Monday.
The S&P 500 and Dow Jones Industrial Average ended modestly
lower, dragged down by a retreat in commodity prices and profit
taking after three weeks of sharp gains. The day's losses amounted
to the biggest percentage retreats on the two benchmarks since
Sept. 1.
The Nasdaq Composite closed higher, helped by hopes that Dell
Inc.'s (DELL) $3.9 billion cash offer for Perot Systems (PER) would
spur more technology mergers.
Analysts said high levels of cash, hoarded by corporate
treasurers during the recession, and low interest rates on
corporate debt means more companies have the ability to pursue
takeover targets. That's a good sign for stocks.
"Merger activity is something that's encouraging," said David
Bianco, chief U.S. equity strategist at Bank of America Merrill
Lynch.
Dell's offer follows Kraft's (KFT) unsolicited takeover bid for
Cadbury (CBY), valued at $16.7 billion when announced, and Baker
Hughes' (BHI) $5.5 billion offer to BJ Services Cos. (BJS).
So far this month, U.S. companies have announced 256 deals worth
$33 billion. That's 42% lower in dollar terms than the same month a
year ago, according to Dealogic.
But activity has started to pick up in some sectors: The volume
of global technology mergers this month is the highest since July
2008, Dealogic says.
'A positive sign'
When there are a lot of mergers, it's "like a vote of confidence
in the economy," said Sam Stovall, chief investment strategist with
S&P Equity Research.
Companies "are doing what they can to ensure they have a solid
position in the industry. Also, it's a positive sign of companies'
outlook on their own stock," he added.
Companies eager to expand into a new business line have plenty
of cash from months of hoarding.
Cash on the books of non-financial companies in the S&P 500
hit a record of more than $700 billion as of June 2009, up more
than 8% in the past year and 16% above the level of two years ago,
says Standard & Poor's Index Services unit.
The sharp rebound in stocks since early March has provided many
with richer share prices, a sweeter lure to potential sellers.
The S&P 500 has rallied nearly 60% off its March low. Since
Sept. 2, it's gained 7%.
Another driver for more merger activity is easier and cheaper
access to corporate credit.
Corporate credit spreads have dropped to below their levels
before Lehman Brothers failed about a year ago, indicating
investors are demanding less yield for corporate bonds relative to
Treasuries. Debt issuance has rebounded sharply.
Bank of America's Bianco said debt capital markets are now
conducive to more deals. He said he's not calling for a surge in
mergers. But more transactions could bolster stocks if earnings
strengthen, as he expects, but plenty of investors keep to the
sidelines.
"I think of M&A activity as something that will keep markets
efficient," he said.
As of Thursday, companies had issued nearly $900 billion in
gross debt this year, surpassing $800 billion for the whole of 2008
and tracking close to a record issuance of $1.1 trillion in 2007,
said Bianco in a report released Monday.
Entertainment, auto, software
S&P analysts anticipate several sectors are getting ready to
see a surge in merger activity, with stronger companies seeking
economies of scale or strategic expansions, and financial distress
forcing some sellers to go on the block.
Entertainment companies, auto-parts suppliers and manufacturers,
retailers, energy shale companies, pharmaceutical and biotech
companies, construction-related businesses and wireless
telecommunications companies are likely to ink more deals in the
coming months, they said.
In technology, larger software companies are probably on the
prowl for fast-growing, smaller firms, the analysts said.
Monday trading
U.S. stocks frequently rally on merger news. But the past weeks'
steep runs, which had lifted the benchmarks to new 2009 highs,
likely encouraged some investors to cash out ahead of the Federal
Reserve's Wednesday interest-rate decision and the G20 meetings at
the end of the week.
"Both the Fed and G20 meeting could have some sort of statement
that applies to pulling back of global stimulus. If some investors
are a bit unnerved by that, that could be a reason of attempted
profit-taking," Stovall said.
The latest flurry of merger activity is likely softening the
drop in stocks Monday, he added.
Energy stocks led the decline as crude-oil futures fell below
$70 a barrel for the first time in a week, dragged down by a
stronger dollar and lingering concerns over weak demand.
Adding some support to stocks Monday, the Conference Board said
its index of leading economic indicators rose 0.6% in August, the
fifth straight increase, indicating the U.S. recession is bottoming
out and a recovery is near.
The S&P 500 (SPX) closed 4 points lower, or 0.3%, at 1,065.
The Dow Jones Industrial Average (DJI) sank 41 points, or 0.4%, to
9,779. The Nasdaq Composite (RIXF) gained 5 points, or 0.2%, to
2,138, its highest close since late September.