Why an M&A Boom Could Be Just Around the Corner

mergers and acquisitionsStock markets have been reeling lately amid fears of an economic slowdown. And investors have piled into safe investments like bonds as a result, prompting some pundits to argue that the enthusiasm for safe instruments like Treasuries has gotten as unhinged as the mania for dot-com stocks was a decade ago.

But as stocks come under pressure, investors should note that the current backdrop is also laying the foundation for a potential boom in mergers and acquisition activity. With stocks depressed, companies sitting on record amounts of cash and a generous bond markets providing easy funding, merger activity is already on the rise in the usually slow month of August. And a jump in dealmaking could help boost equities, especially those that get taken out at the big premiums that have been put on the table recently.

Sweet Debt Terms

So far, August has already seen $175 billion in takeovers, putting it on pace to trump March as the biggest months for merger activity this year, Bloomberg noted. And seven of the month's ten biggest deals have been cash offers, which could set the pace for the rest of the year -- the world's biggest thousand companies outside the financial sector sit on $2.86 trillion in cash.

Intel's (INTC) $7.68 billion bid for security company McAfee (MFE), the biggest acquisition by far in the chip giant's history, is the latest and most prominent example of this dealmaking. And cash-rich technology and telecom companies could be especially aggressive.

But acquirers can also take advantage of the massive appetite for bonds over stocks by issuing debt on fantastic terms and buy companies trading at valuations that tend to be far below their historical averages.

Investor willingness to choose corporate bonds over stock has been staggering. Ten of the lowest-yielding bond deals ever took place over the last 14 months, according to Deutsche Bank. Earlier in the month, tech giant IBM's (IBM) ability to issue $1.5 billion in three-year notes at a record 1% coupon became an emblem of investor enthusiasm for big company bonds.

And BHP Billiton (BHP) was able to line up $45 billion in credit for its high-profile proposed takeover of Potash (POT), using just six banks.

Frenzied dealmaking could signal a turning point for the stock market and sentiment shifting. In March, companies wanted to move before a fast-rising market made share prices even more expensive amid improving economic expectations. This time, though, it would merely signal that corporate bosses felt the sentiment couldn't get much more sour.

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scorchmonster777

EWE'S BARRY SHEEPS R TOO MUCH~~

August 23 2010 at 8:12 PM Report abuse +1 rate up rate down Reply
scorchmonster777

HOW YOU ALLS DEMOCRATS DOING? I HAVE SOME NICE BIG BOOBED REPUBLICAN WOMEN FLASHING OUR GOOD MAMMORIES , HOW TO MAKE AMERICA GREAT AGAIN !!!!!!!

August 23 2010 at 8:11 PM Report abuse +1 rate up rate down Reply
scorchmonster777

OBAMA HAS LIFE ,AMERICA ....QUIT LOVING THE MOSQUE BEING BUILT !!!!!!!!oK HERE WE GO!.........I'M VOTING NO MORE MUSLIMS!!!

August 23 2010 at 8:04 PM Report abuse +1 rate up rate down Reply
andylhale

The headline states "Why an M&A Boom Could Be Just Around the Corner," but no where in the article do you define what a "M&A" is. I suspect that the headline for your articles are written by people whom you might never meet, you know, those lowest of life forms to we who wrote for a living....EDITORS!!

August 23 2010 at 5:58 PM Report abuse +1 rate up rate down Reply
butch

THANKS MR. BUSH FOR YOUR WONDERFUL LEGACY!

August 23 2010 at 4:21 PM Report abuse rate up rate down Reply
usapaydirt

Fools at the wheel-- Fools at the wheel-- Where livin through Hell with the Fools at the wheel-- mortage upside down and finances turned sideways -- fools at the wheel!!! I know this tune......

August 23 2010 at 3:48 PM Report abuse +3 rate up rate down Reply
hemipwr54

shalebrook , must be a Spin Doctor by trade , but what it (don't know if it is a he or she) said is quite wrong , when a recession is worse and is perceived to be worsening M&A occur more , shuffling of funds in a attempt to protect shareholders in host company , shoring up before the storm , if you will . Smoke and Mirrors !

August 23 2010 at 3:43 PM Report abuse rate up rate down Reply
shalebrook

If you simplistically define the M&A market as the very few mega deals that always seem to take place, then Mr. Kumar's hypothesis may be correct. However, the vast majority of acquisitions take place in the "middle market" where companies ranging in size from $5-200 million or more depending on your definition of middle market actually take place. The reality is that M&A money for mid market acquisitions is still scarce-especially in the auto, construction and big ticket appliance business sectors. Most banks still prefer to essentially lend back to the federal Reserve their excess cash to get the same rate they could have gotten by processing a business loan. As a consequence, M&A's have increased somwhat from 2009 but the market is still not a healthy one, especially when you consider the disproportionate amount of distressed & failing business sales that have occured during that time frame-many of them businesses sold out of bankruptcy. Mr. Shah's hypothesis also doesn't take into account the impact of what may be a second recession in 2011 and its ripple effect on acquisitions. Typically during a recession, most otherwise avid buyers tend to avoid major capital investments of all types-including acquisitions-until the clouds of the recession begin to clear up. I see no reason to believe that this will NOT be the case in 2011. Consumer and big ticket purchases are already slowing down as the consumer expresses concern about the economy. And if the tax cuts are allowed to expire and increases contained in the health care bill are allowed to stand, then far less money will be used for investment in job creation/business growth. You don't need a complex economic model to arrive at my scenario-just a little common sense-poor bank lending, weakness in major industries such as construction,higher taxes and a continued high rate of unemployment etc. are there for all to see.

August 23 2010 at 3:31 PM Report abuse rate up rate down Reply
mpado16

wat the heck is an M & A exactly?

August 23 2010 at 2:14 PM Report abuse rate up rate down Reply
van

I want full disclosure on ownership or stock options on ANY M&A transaction in America. What is the problem with that unless your trying to pull something that America does not agree with?? We work for our pensions. Name the names behind the Corporations and where they are based OUTSIDE of America, not their Delaware Corp. Who they really are.

August 23 2010 at 2:07 PM Report abuse rate up rate down Reply