Cheaper stock prices could trigger mergers
NEW YORK » The beating Wall Street suffered this past week might have actually created the perfect conditions to launch its revival -- cheaper stock prices can herald a comeback for corporate acquisitions.
Dealmaking has been one of the market's biggest drivers, with some $1.26 trillion worth of acquisitions and private equity transactions announced in the U.S. so far this year. Market watchers believe mergers and acquisitions -- particularly by big public companies -- might be the catalyst to help get Wall Street back on track after the volatility seen in the past few weeks.
Investors have weathered some tough sessions where stocks zigzagged, making triple-digit gains and losses. The Dow Jones industrials rose more than 150 points on Wednesday, then plunged about 400 points on Thursday and fell more than 200 points Friday before closing with a minuscule 31 point loss.
"Public companies are still sitting with tremendous amounts of capital, and with valuations going down, this is a very good opportunity for strategic takeovers," said Quincy Krosby, chief investment strategist for the Hartford. "No matter what kind of stock market conditions you're in, there will always be catalysts."
The four-year bull market has enabled U.S. companies to build record cash stockpiles, with Standard & Poor's 500 components now sitting on about $600 billion. And, sluggish market periods make it more difficult for companies to raise earnings by organic growth alone -- forcing them to make acquisitions.
The dot-com bust in 2000 and the Sept. 11 attacks the following year sent Wall Street into a 3-year-long slump. Economists have largely credited the resurgence of mergers and acquisitions in 2003 and the soaring real estate market as the two biggest reasons why stocks recovered.
Wall Street's latest stumble was caused by faltering subprime loans and fears that credit is drying up for corporations as well as individuals. The Federal Reserve injected $38 billion of liquidity into the banking system Friday, but that's a short-term solution and even if the Fed were to placate investors with lower interest rates, the market likely will need to look elsewhere to find its underpinnings again.
Analysts believe the pullback in stocks might make big companies eager to put deals together. Adding even more encouragement is the fact that private-equity firms -- which have competed with big companies for prime acquisition targets -- have been all but sidelined because it's been harder to raise money in the debt markets.
Buyout firms have been one of the biggest drivers of M&A this year, accounting for about 16 percent of all U.S. deals announced. But firms like Blackstone Group Inc. and Kohlberg Kravis Roberts & Co. are said to be having a tougher time raising the financing to put transactions together.
Hugh Moore, a partner at Greenville, S.C.-based Guerite Advisors, said the economy could be close to recession, which could make companies think twice about big acquisitions regardless of how cheap valuations look.
Moore said investors might just have to "muddle through an economic situation that will probably last through most of 2008." Helping to sustain U.S. companies will be their operations overseas, where markets are expected to grow.