Investor Sentiment

What’s the Deal?

By, 06/25/2008

Story Highlights:

  • Despite continued credit crunch concerns, cash-based and debt-financed M&A is alive and well.
  • M&A activity decreases stock supply, which should boost long-term returns.
  • Fundamentals are strong, despite widespread uncertainty.

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It's no secret markets have been volatile. Resulting fatigue can make it easy to miss signs—right in front our noses—that things aren't nearly as bad as many think.

Corporate Acquirers Line Up for M&A Buffet
By Matthew Monks, Financial Week
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080616/REG/15926486

When the credit crunch fears were at their height, cash-based and debt-financed mergers and acquisitions were expected to cease. Indeed it may have looked that way, as M&A volume fell (albeit from record-high levels) in late 2007 and early 2008. But it's increasingly clear cash-based deals are far from done, as the last few months have brought a wealth of M&A activity, particularly from larger firms. According to Dealogic, 2008 has seen 3,051 mergers and buyouts, totaling $529.7 billion—some of them very large, like these:

InBev Offers $46.3 Billion for Anheuser-Busch
By Staff, Reuters
http://www.reuters.com/article/companyNewsAndPR/idUSL1238085420080612

RBS to Sell Angel Trains to Babcock Team for $7 Billion
By Denny Thomas and Marc Roca, Reuters
http://www.reuters.com/article/rbssBanks/idUSL135208220080613

HP to Buy EDS for $12.6 Billion in Challenge to IBM
By Franklin Paul, Reuters
http://www.reuters.com/article/businessNews/idUSN1230539620080513

Mars, Buffett Buying Wrigley for $23 Billion
By Brad Dorfman, Reuters
http://www.reuters.com/article/innovationNews/idUSWNAS003720080429

So far this year, we've seen more deals through June 2008 than we did through June 2007.

What's the deal here, so to speak? For one thing, these deals are being transacted in cash, which means these firms either have enough cash on their balance sheets or are able to borrow it easily. Credit is no doubt tighter for small firms and poor-credit risks, but despite headlines to the contrary, money remains cheap and easy for the largest, better-rated publicly traded firms—and they comprise the majority of aggregate borrowing. There's no credit crunch for most of the market, from a capitalization standpoint. And, if things were as bad as folks assume, we just wouldn't be seeing this resurgence in deals.

Something else to think about: When companies borrow and/or use cash, rather than stock, to buy other companies, it takes stocks out of circulation. We've seen new stock supply this year from a few big IPOs and Financials raising capital. Remember from Econ 101—increased supply can mean falling prices. Not good! But cash-based M&A acts as a powerful counterbalance, keeping share supply constrained. Big M&A deals are a positive force for stocks this year. And a little-noticed one at that. Few note the pace of deals recently, nor comment on their stock-supply-destroying capability.

We know it doesn't all feel like wine and roses out there—volatility is tough to bear and fatiguing. Sentiment can cause uncomfortable short-term moves—in either direction. But in the long run, markets move on fundamentals—and the M&A surge is a positive fundamental force. And remember: When so few investors acknowledge a positive like big M&A deals and agonize only on negatives, it's a good sign markets have plenty of the proverbial wall of worry left to climb.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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