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business newsWill M&A Move the Market?
By
Josh Lipton Nov 16, 2010 1:30 pm
Market pros differ on whether M&A is cause for bullishness.
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History, serving as guide but never as gospel, is also on the side of the cheerful: Sam Stovall, S&P’s chief investment strategist, notes that on November 4, the S&P 500 closed at 1221, recovering in four months all that was lost during the 16% price correction for the “500” that occurred between April 23 and July 2.
The question many investors ask following a recovery is this: What happens after we get back to breakeven? History suggests, says Stovall, that this market advance has further to run before succumbing to another meaningful decline. Specifically, since 1946, once corrections have run their course, the “500” continued to rise an additional 10%, on average, over 121 calendar days, before encountering another decline of 5% or more.
Still another reason to remain upbeat, according to the optimistically-inclined Ed Yardeni of Yardeni Research is this: the enormous liquidity in corporate balance sheets and the likelihood of more M&A activity. He notes that non-financial corporations held a record $1.8 trillion in liquid assets at the end of the second-quarter.
In fact, according to a new survey conducted by Thomson Reuters and Freeman Consulting Services, worldwide mergers & acquisitions could jump by 36% in 2011 to the highest level since the credit crisis, driven by a pickup in real estate and financial services deals. M&A volumes could surpass $3 trillion next year, the highest since 2007’s $4.28 trillion, according to the poll. The survey included 150 individuals representing firms ranging from small, regional businesses to global conglomerates. Respondents said that Emerging Asia and North America are the most attractive regions for M&A in 2011.
Yesterday, headline-making news on the merger front came from Caterpillar (CAT), which agreed to purchase Bucyrus International (BUCY) for $8.6 billion. EMC’s (EMC) $2.25 billion purchase of Isilon Systems (ISLN) brings to 47 the number of firms the data-storage maker has now gobbled up.
(For Todd Harrison's thoughts on this subject, check out the latest Random Thoughts video.)
Of course, not every strategist agrees that a pickup in M&A is necessarily a reason for bullishness. Miller Tabak’s Peter Boockvar, for one, argues that it’s certainly good news for investors whose shares get acquired, but he doesn’t see an M&A uptick as portending better times ahead for the overall market.
After all, Boockvar emphasizes, we witnessed a flurry of M&A activity in 2007. “That was probably one of the worst times in history to buy the market,” he says. “So I don’t use this as an indicator of future performance.”
Also, he says, references to all that cash sitting on corporate balance sheets should come with the following critical caveat: according to the Fed’s latest Flow of Funds report, companies are also saddled right now with a record amount of debt.
“Cash is an asset on the balance sheet,” Boockvar says, “but people haven’t been talking about corresponding liabilities.”
No positions in stocks mentioned.
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