Investor's Business Daily
Merger Activity Ramps Back Up Along With Stocks And Economy
Tuesday December 14, 7:00 pm ET
Laura Mandaro
Corporate America wants to get big again.
After three years of relatively sluggish merger activity, much of it due to companies downsizing and restructuring, M&A activity has returned to expansion mode.
In just the past week, sources said Sprint (NYSE:FON - News) is in talks to buy Nextel (NasdaqNM:NXTL - News) in a $36 billion deal to create a bigger No. 3 U.S. cell-phone carrier.
Security software firm Symantec (NasdaqNM:SYMC - News) on Tuesday was said to be discussing a $13 billion takeover of Veritas (NasdaqNM:VRTS - News), giving it a pool of products that store and back up computer files.
And Johnson & Johnson (NYSE:JNJ - News) is reportedly near a $24 billion deal to buy medical device maker Guidant (NYSE:GDT - News). J&J would get access to the fast-growing heart defibrillator market and expand its drug-coated stent line.
M&A Hot In December
If just the Nextel-Sprint and J&J-Guidant deals get inked, December could turn out to be the busiest December since 1999, with about $80 billion in announced deals, says Thomson Financial.
That total wouldn't even include a $10 billion Oracle (NasdaqNM:ORCL - News) and PeopleSoft (NasdaqNM:PSFT - News) linkup.
PeopleSoft finally agreed to a takeover Monday after a bitter 18-month dispute. But the union has been on the M&A books since June 2003.
The goal for all firms is to get more -- more customers and product, for a start.
"A lot of work done over the past years was about taking costs out, improving productivity," said Robert Filek, a partner at PricewaterhouseCoopers. "As the economy, especially the global economy increases, you'll see people make acquisitions to secure capacity to meet customers' demand."
Plus, companies are looking for mergers that will give them an edge in pricing and supply.
Sears' (NYSE:S - News) planned $14 billion acquisition of Kmart (NasdaqNM:KMRT - News) should increase economies of scale for two retailers that have had trouble passing on cost increases to consumers.
For investors, a pickup in mergers confirms signs of increased confidence in the market. M&A activity tends to rise and fall along with the stock market.
The same factors driving the S&P 500 up 8% so far this quarter to a 40-month high have helped propel merger activity. The economy is growing at a healthy clip, oil prices have retreated sharply from record highs, the presidential election went smoothly and terror fears have faded.
"It's a return to risk appetite," said Russ Koesterich, chief U.S. equities strategist for State Street Global Markets. "Investors and CEOs are willing to commit capital and that's driving the market higher and increasing M&A activity."
Best Get Bigger
So it's not surprising that some of the best-performing groups this year are also ones that are producing linkups.
Overseas Shipholding (NYSE:OSG - News) on Monday announced a $843 million buy of oil tanker Stelmar (NYSE:SJH - News). The Transportation-Ship group is up 89.7% so far this year, No. 3 out of IBD's 197 industries.
Steel producer Ispat International (NYSE:IST - News), which has gained 323% this year, in October said it would buy International Steel for $4.4 billion. Metal stocks have soared along with commodity prices.
And oil and gas companies, which have climbed steadily since January, were the fourth-most active buyers this year, says FactSet Mergerstat.
In some cases, CEOs might be rushing to find acquisitions to take advantage of a run-up in their stock prices.
But a slew of deals in a top-performing industry doesn't necessarily mean the sector has reached a peak.
"Mergers are less of a prediction of tough times ahead than a recognition of tough times in the past, when companies maybe wanted to do deals but couldn't," said Jeff Rosenkranz, who co-heads middle-market mergers advisory for Piper Jaffray.
Experts expect merger activity next year to at least match 2004's pace. So far, companies have announced just over 7,600 deals worth $680 billion, or about the same number of deals as in 2003 but worth 25% more. That doesn't include possible Sprint-Nextel, J&J-Guidant or Symantec-Veritas deals.
One sector likely to profit is that including investment banks and brokerages, or the firms that reap high-margin merger advisory fees, Koesterich says.
Meanwhile, experts expect a growing global economy, fueled in large part by China's rapid expansion, to keep tightening supply and driving up prices, especially for raw materials.
Earlier this month, Japanese automaker Nissan (NasdaqSC:NSANY - News) warned a steel shortage would cause its production to miss estimates.
High demand for commodities could cause some manufacturers to take control of the raw supply -- by buying the supplier.
"As 2005 progresses, one of the things to watch is commodity prices," says PricewaterhouseCoopers' Filek, "Manufacturers could find themselves in a battle for scarce resources. ... One reaction is to go and secure the suppliers."
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