How the Dow Wins From Mergers and Acquisitions

The Dow Jones Industrials bounced back from yesterday's minor losses, climbing more than 65 points on Thursday, and returning to within 20 points of an all-time closing record. One of the things that has helped propel the broader stock market higher is the wave of merger and acquisition activity. Not only are big buyout bids raising the share prices of the stocks involved in those mergers, they're also bolstering the prospects for Dow components Goldman Sachs and JPMorgan Chase , as well as former Dow member Bank of America and other big Wall Street players.

Investors know quite well that a buyout bid often involves paying a huge premium to the prevailing share price on the open market. Part of the reason for paying more than the market price is that a full takeover of a company is worth more than just buying a passive minority stake, which is what the vast majority of individual shareholders own and, therefore, what drives the current share price on the stock exchange. But in many cases, a combination actually does offer the chance to unlock cost savings, and realize potential that's unattainable separately.

Where Goldman Sachs, JPMorgan Chase, and Bank of America come in is in advising the companies involved in a deal, with the opportunity to help would-be buyers decide whether or not a particular acquisition is a good match. They also help would-be target companies assess whether an offer from a prospective buyer is fair and represents the full value of the company. According to information from Thomson Reuters, Goldman Sachs has been the leader in global merger and acquisition advisory services, with the Wall Street giant having advised on almost $600 billion in deals so far in 2014. Bank of America is in third place at just over $500 billion, and JPMorgan Chase is also among the top five companies in the mix.

Moreover, the long-term benefits of advising on business combinations can also drive future business for Goldman, JPMorgan, Bank of America, and other M&A advisors. Once a financial firm knows a company's business model intimately, it puts them in a much stronger position to advise them on other major financial moves, such as spinoffs, major asset sales, securities offerings, and future mergers and acquisitions.

The financial industry has been under pressure recently to make the most of a tough environment for interest rates and proprietary trading activity alike. M&A could be the saving for grace for Dow components JPMorgan Chase and Goldman Sachs, and their influence could help the entire Dow Jones Industrials benefit from the mergers and acquisitions trend.

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Dan Caplinger owns shares of Bank of America and JPMorgan Chase. The Motley Fool recommends Bank of America and Goldman Sachs. The Motley Fool owns shares of Bank of America and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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