By Laura Mandaro
The latest flurry of merger activity is likely offsetting some
of the profit-taking that's driving stocks lower Monday, said
S&P Equity Research strategist Sam Stovall.
"You could say we got a bit of pop, we started off down much
more we are now," he said.
U.S. stocks pared losses Monday midmorning, and the Nasdaq
turned higher, as investors reviewed the latest round of merger
news and the fifth straight rise in the index of leading
indicators.
The S&P 500 (SPX) fell 3 points, or 0.3%, to 1,065. The Dow
Jones Industrial Average (DJI) sank 34 points, to 0.3%, to 9,788.
The Nasdaq Composite (RIXF) gained 5 points, or 0.3%, to 2,138.
On Monday, Dell Inc. (DELL) said it was buying Perot Systems
(PER) for $3.9 billion in an all-cash deal designed to boost Dell's
sales of technology services.
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 of attempted
profit-taking," Stovall said.
In general, however, analysts said the recent round of mergers
is a good sign for the market.
Dell's deal announcement follows Kraft's (KFT) unsolicited
takeover offer for Cadbury (CBY), valued at $16.7 billion when
announced over the Labor Day holiday weekend, and Baker Hughes'
(BHI) $5.5 billion offer to BJ Services Cos. (BJS).
When there's a lot of mergers, "companies are saying they have
increased faith, like a vote of confidence in the economy, they're
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," Stovall said.
One driver for more merger activity is easier and cheaper access
to corporate credit.
Corporate credit spreads having dropped to below their levels
before Lehman Bros. failed about a year ago, indicating investors
are demanding less yield for corporate bonds relative to
Treasuries. Debt issuance has rebounded sharply.
"As confidence in a sustainable economic recovery increases,
companies are likely to turn their attention back toward strategic
M&A," wrote Bank of America-Merrill Lynch strategist David
Bianco in a report made public Monday.
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.
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.