The megabuck merger is back on Wall Street.
It's still not where it was two years ago, before the market's meltdown brought activity to a near-standstill.
But a steady drumbeat of multibillion-dollar deals in the last few weeks -- including Dell's (DELL, news, msgs) proposed takeover of Perot Systems (PER, news, msgs), Xerox's (XRX, news, msgs) bid for Affiliated Computer Services (ACS, news, msgs) and Walt Disney's (DIS, news, msgs) takeover of Marvel Entertainment (MVL, news, msgs) -- shows it's party time in the takeover market again.
This trend is crucial for three reasons:
- First, it shows that top executives and board members -- the folks who know the economy best -- are bullish again. "You don't look to be bigger unless you're optimistic," says Uri Landesman, a senior portfolio manager at ING Investment Management. In short, this is a sign the economy may be stronger than a lot of investors believe. "It's very, very meaningful," says Landesman.
- Next, it shows that despite the 50%-plus rise in stocks since the March low, stocks are still reasonably priced -- at least in the eyes of corporate buyers who don't like to overpay.
- Third, when you own the right takeover stock, the payoff can be huge. Shares of Perot Systems jumped 66% on news that Dell wanted to buy. The short-term profit can easily be in the 50% range -- often reaped in a single day.
These expectations support a sustained bull market, because it means investors will hold on to stocks as they move higher on the chance the company will get bought, says Landesman.
Jefferies & Company analyst Joseph Vafi believes a bidding war will break out for Xerox target Affiliated Computer Services as potential suitors like International Business Machines (IBM, news, msgs) and Hewlett-Packard (HPQ, news, msgs) step in to compete for the prize.
For investors, speculating in takeover targets can be tricky. It should never be the only reason you own a stock. Still, it's tempting, so I've come up with 25 potential buyout candidates in four sectors.
Before we get to that, let's settle a little debate: How much has the level of mergers and acquisitions -- M&A -- activity picked up?
How hot is this market?
The short answer is that deal activity did pick up in significantly in September on a worldwide basis, according to numbers prepared for me by Thomson Reuters. But as with most things, it depends how you slice the data.More from MSN Money
Overall -- as bearish commentators enthusiastically point out -- deal activity slowed in the third quarter, compared with the second. But the third quarter includes the typically sluggish vacation months of July and August.
To me, here's what's more significant: In September on a worldwide basis, M&A activity popped above the year's monthly average total -- $162.9 billion -- to $172 billion, according to Thomson Reuters. The hottest sectors are energy, health care, technology, materials and financials.
Yet these numbers only tell part of the story. M&A deals take many months to pull off. So what's as important as the number of completed deals is the level of conversation and serious negotiation about deals. Here, the phone lines are popping. I talked with about a half-dozen M&A advisory shops last week, and all had the same story. The level of M&A deals in the works is high -- in some cases as high as it's been in the past five years.
"We've seen a very significant uptick in activity since the Labor Day holidays," says Scott Humphrey, the head of BMO Capital Markets' U.S. mergers and acquisitions group. "CEOs and boards are getting more confident about taking on strategic transactions."
At General Capital Partners, a national investment bank specializing in M&A involving distressed companies, the typical number of deals in discussion at any one time during 2004-07 was about a dozen or so. Now it stands at 20, says managing director Greg Barrow.
Video: What mergers mean for the market
"There's just a lot more interest today than two months ago," agrees Paul Schneir, managing director of mergers & acquisitions at KeyBanc Capital Markets, based in Cleveland. "I think you're going to see M&A continue to build over the next six to 12 months."
Reasons for the return to M&A
I see four reasons M&A is picking up:No more "bunker mentality." Companies have overcome the bunker mentality of cutting costs and dividends, and building cash to deal with uncertainty. Now, in what looks like a slow-recovery environment, they want acquisitions to build revenue, product lineups and markets.
Indeed, the first wave of deals earlier this year was about "bottom fishing" for cheap companies, says Peter Bell, general partner at Highland Capital Partners, a venture-capital firm in Boston. That's now changed to companies looking for ways to get access to intellectual property, and to new products and markets. "People are looking for game-changing companies where there is significant momentum in the business," says Bell. "They want to talk about the winners now."
He cites Adobe Systems' (ADBE, news, msgs) proposed purchase of Omniture (OMTR, news, msgs), which analyzes Web usage, and IBM's purchase of SPSS in database analysis as examples of companies making acquisitions outside their core businesses to get access to new expertise.
Continued: Cash levels are high
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