As Merger Activity Picks Up, Is That Good News for Stocks?
That's significant because M&A helps boost share prices, says Art Hogan, chief market strategist at Jefferies & Co. "It makes a statement about valuations," he says. "If you have companies coming in paying premiums of 30%, 40%, 50%, that sends a signal to the market that some stocks or sectors are undervalued."
It also shores up market psychology, Hogan says, since it creates the perception that there are aggressive buyers out there. "And then you get the sympathy effect," he says, where other companies in the same industry as the acquisition target rise on the possibility that they could get taken out, too.
Let us also not forget that Monday's announced deals were really just chump change compared to what's happened in the last two months: Exxon Mobil (XOM) said last week it'll fork over $31 billion for XTO Energy (XTO); Warren Buffett put up nearly $27 billion for the part of Burlington Northern Santa Fe (BNI) he doesn't already own; and Stanley Works (SWK) last month said it's paying $3.5 billion for Black & Decker (BDK).
Hogan expects deal activity to really pick up in the first quarter because so many companies are sitting on piles of cash. If that's the case, it could be a tailwind for share prices. A look at Mergermarket data shows there's correlation between M&A and stocks. For better or worse, global M&A activity peaked at nearly $1.2 trillion in first quarter of 2007, anticipating the S&P 500's ($INX) all-time high by about six months.
As much as shares may look priced to disappoint for years to come, the upward trend in M&A is another reason why stocks could have even more upside in 2010.