Flurry of Mergers and Acquisitions Drives Stock Market Rally

A flurry of mergers-and-acquisition deals in the pharmaceutical and technology industries today (Monday) sparked a sharp market rally, snapping a three-day losing streak and giving stocks to their biggest gains in five weeks.

The pickup in merger activity bolstered arguments that mergers and acquisitions (M&A) are rebounding from the biggest slump in six years. It ignited a stock market rally that saw the Dow Jones Industrial Average jump 124.17 points, or 1.28% to close at 9,789.36. Meanwhile, the Standard & Poor's 500 Index surged 18.6 points, or 1.78% to 1,062.98 and the Nasdaq Composite Index rose 39.82 points, or 1.9%, to 2,130.74.

Any increase in dealmaking activity tends to move markets higher as it drives investors to speculate by buying shares of companies they think might be targeted for acquisition.

Drug-industry bellwether Johnson & Johnson (NYSE: JNJ) invested $442.7 million for a 18.1% stake in flu vaccine-maker Crucell (NASDAQ: CRXL). Meanwhile, Abbott Laboratories (NYSE: ABT), JNJ's smaller rival, purchased the pharmaceutical business of Belgium's Solvay SA (OTC ADR: SVYSY) for as much as $7 billion.

Technology heavyweight Xerox Corp. (NYSE: XRX) added to the frenzy by announcing it would pay $6.4 billion in cash and stock for outsourcing and information-services company Affiliated Computer Services Inc. (NYSE: ACS).

Finally, private equity firm American Securities purchased GenTek Inc (NASDAQ: GETI), a U.S. maker of specialty chemicals and engine components, for $411 million.

The merger activity buoyed the market after U.S. stocks fell last week on news of disappointing housing and durable-goods reports.

"We've seen a pickup in acquisitions and it's a very big plus," Hugh Johnson, who manages more than $1.6 billion as chairman of Albany, N.Y.-based Johnson Illington, told Bloomberg News. "It's always good news when you see money come into the market."

Johnson & Johnson and Abbott have been on buying sprees this year.  Abbott has been particularly active this month, buying medical device company Evalve Inc. for $410 million and Visiogen Inc. for $400 million.

Abbott's purchase of Solvay's drug unit was mainly aimed at shoring up its sagging prescription drug business with a number of new medicines in late stages of testing, sources familiar with the deal had earlier told Reuters. The deal also gives Abbott an important foothold in emerging markets in Asia and Europe.

Xerox, based in Norwalk, Conn., hopes to erase a drop in sales of large copier systems and printers for offices. The deal for ACS, an information technology consulting firm with large government contracts, is expected to triple Xerox's services revenue next year to an estimated $10 billion from 2008's $3.5 billion, according The Wall Street Journal.

Xerox's agreement comes on the heels of Dell Inc.'s (NASDAQ: DELL) purchase of information-technology service provider Perot Systems Corp. (NYSE: PER) for $3.9 billion. And that was preceded in April by Oracle Corp.'s (NASDAQ: ORCL) purchase of Sun Microsystems Inc. (NASDAQ: JAVA) for $7.4 billion.

The stage is set for a surge in mergers and acquisitions, according to data compiled by Credit Suisse Group AG (NYSE: CS) and Bloomberg.  U.S. companies are building cash reserves compared to the cost of interest on corporate bonds at the fastest rate in history, the research shows.  Firms are likely to increase cash flows to more than $1.5 trillion, the level the Commerce Department reported in July.

Additionally, in relation to corporate bond yields, cash holdings compared to share prices will jump to the highest levels in 20 years in 2010, the data shows.  The two biggest years for takeovers in history came after the previous high in 2005.

Further good news for the markets comes from another study conducted by the Investment Company Institute and Bloomberg, showing Americans are sitting on $3.5 trillion in cash. Investors have cash equal to 73% of S&P 500 companies' net assets, the study shows, even after draining money-market accounts by 11% this year. Investors only held 62% of net assets at the peak of the bull market in 2007.

The combination of increased merger activity and the giant cash horde held by investors is increasing money managers' confidence that the stock market rally will continue until at least the end of 2009.

"M&A can be a driver of gains for the market," Benoit de Broissia, an analyst at KBL Richelieu Gestion in Paris, told Bloomberg. "It illustrates that industrials have the cash to invest and consider valuations attractive. We can expect the M&A movement to continue."

News & Related Story Links:

• Bloomberg:
  U.S. Stocks Climb on Takeovers; Affiliated Computer Surges
• Money Morning:
  The U.S. Market for Deals Remains in a Deep Freeze
• Reuters:
  Solvay sells drugs unit to Abbott for $6.6 billion
• Money Morning:
  Dell Looks to Services in Perot Acquisition to Pick Up Slack for Slow PC Sales