By William L. Watts, MarketWatch
NEW YORK (MarketWatch) -- Merger Monday is now often followed by
Merger Tuesday, and investors are cheering a long-awaited
resurgence in corporate mergers and acquisitions. But is the pickup
something for market bulls to celebrate, or does it herald the end
of the rally?
"You worry a little bit that M&A activity tends to pick up
as the market matures, and not in the early stages of a bull
cycle," said Mitch Schlesinger, managing director at FBB Capital
Partners in Bethesda, Md.
The pickup doesn't necessarily signal the end of the recovery or
of the bull market, but "you do want to put it in the context of a
fairly slower-growth environment where people are either buying
growth, or they are consolidating industries because of slow
growth," he said, in a phone interview.
Topping $1 trillion
There have been 5,844 targeted U.S. M&A transactions in the
year-to-date valued at $1.04 trillion (see chart above), according
to Dealogic. This marks the first year deal volume has topped $1
trillion over that period since 2007. Volume over the same stretch
last year totaled $597.8 billion.
Big-time first-half deals include AT&T's (T) agreement to
purchase satellite-television provider DirecTV (DTV) and
Medtronic's (MDT) pact to purchase fellow medical-equipment maker
Covidien (COV) for $43 billion.
Signs of further activity on the deal front could sway stocks in
the week ahead as market participants brace for the heaviest week
of results yet for second-quarter earnings season, weigh the
outcome of a Federal Reserve policy meeting, and deal with top-tier
economic data, including a first look at second-quarter U.S. gross
domestic product and the ever-crucial monthly jobs report for
July.
While surging M&A activity can belie nervousness over the
growth environment, it also reflects diminishing unease over
potential economic and political pitfalls.
"Everyone we talk to is looking forward, not behind. We're two
more years beyond the '08-'09 recession. Not that people have
forgotten about it, but they're more concerned about growth targets
than they are about another [round of] financial instability," said
Robert Rubino, head of corporate finance and capital markets at RBS
Citizens in Boston, in a phone interview.
Whether that confidence is appropriate only time will tell, but
it's also not the only factor behind the increased volume, Rubino
and others say.
Low interest rates, courtesy of the Federal Reserve's near-zero
rate policy, provide for easy financing. Also, the stock market's
relentless rise to new records gives companies hunting for targets
plenty of ammunition for share swaps.
Then there are the so-called tax inversions, in which companies
seek to merge with a partner from a low-tax country to take
advantage of a loophole in the tax code that lets them avoid U.S.
taxes. President Barack Obama has called for short-term steps to
block inversions.
Lack of froth, so far
John Kvantas, director of equity research at USAA in San Antonio
said stocks seem due for a correction given their long run without
a major pullback, but he's not convinced the pickup in M&A in
particular should sound any alarm bells.
Kvantas and others noted that the current round of M&A has
often seen the prices of shares of the acquiring firm rise
alongside the price of the target. Typically, in other M&A
cycles, the price of the acquirer would drop, while the price of
the target would rise. The current phenomenon is often taken as a
sign prices for deals aren't terribly out of whack and that the
cost-savings assumptions penciled in by the companies are within
the realm of reason.
"When things get a little more frothy on the M&A side,
that's when you get a little bit more concerned that companies and
investors are starting to push the envelope," Kvantas said in a
phone interview.
Earnings deluge, data and the Fed
Meanwhile, next week brings a flood of earnings, including
results from Twitter Inc. (TWTR) on Wednesday, Exxon Mobil (XOM) on
Thursday, and Berkshire Hathaway (BRK/A) on Friday.
Of the 230 companies in the S&P 500 that had reported
earnings through Friday, 76% topped earnings forecasts, while 67%
beat sales estimates, according to FactSet.
Wall Street turned in a flat-to-weaker performance last week,
with the Dow Jones Industrial Average (DJI) slipping back below the
17,000 level to post its biggest weekly decline in six weeks. The
S&P 500 (SPX) ended the week virtually flat after notching
another record earlier in the week, and the Nasdaq Composite (RIXF)
gave back 0.5%.
The economic calendar is packed. On Wednesday, investors will
get ADP's take on private-sector payrolls at 8:15 a.m. Eastern,
followed by second-quarter GDP data at 8:30 a.m. and the Federal
Reserve's policy statement at 2 p.m.
Thursday sees weekly jobless claims, while Friday brings the
July jobs report. Economists surveyed by MarketWatch look for
nonfarm payrolls to rise 228,000 after an increase of 288,000 in
June.
More from MarketWatch:
Unbelievable collapse in small-cap stocks
Goldman cuts view on global stocks over 3 months to neutral
Subscribe to WSJ: http://online.wsj.com?mod=djnwires