TUESDAY SEPTEMBER 29, 2009

Merger Mania?

Yesterday’s market rally was fueled by the announcement of three large merger and acquisition deals. Indeed, in recent weeks, there has been a spate of M&A activity (Xerox-Affiliated Computer, Abbot Labs-Solvay SA, Disney-Marvel Entertainment, Kraft-Cadbury, Dell-Perot Systems.) This activity is encouraging for the stock markets.


Corporations have held their cards close to the vest in the aftermath of the recession. The depth of the recession forced corporations to be very cautious. As a result, they have cut expense and reduced debt. Cash balances are at record levels. The fact that some corporations are beginning to spend that cash and acquire other companies is a sign that confidence is beginning to return to the board room. Good news indeed. And, I would expect M&A activity to accelerate. Why? The general consensus of mainstream economists calls for a fairly slow economic recovery. If these slow growth forecasts hold true, it will be difficult for companies to grow revenues organically. Therefore, acquisition will be a key factor in returning revenue and earnings to growth.

 

On a cautionary note, I would discourage investors from trying to play the “takeover game.” It is very difficult to cherry pick the companies that are taken over. Sure, it would be great to capture the big stock prices moves of an acquisition announcement, but this is a difficult game to play. Also, the price action on the acquiring company’s stock is typically negative. Studies indicate that the acquirer often overpays for the target and also fails to capture the cost savings/synergies that are forecast. Therefore, the new, combined company also has trouble posting healthy returns. 

 

Merger Mania is a difficult game to play, let alone win. Nonetheless, the improved corporate confidence indicated by this recent M&A activity is another encouraging sign for the equity markets.

POSTED AT 1899-12-30 15:12:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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The opinions expressed here do not represent the views of Alliance Financial Corporation and Alliance Bank, N.A. This communication is not an offer or solicitation for the purchase or sale of any security, is for general informational purposes only and does not provide personalized investment advice. When making personal investment decisions you should consult your investment adviser or rely on your own research. Copyright 2008.