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 for 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.