What the M&A surge says about the stock market

By William L. Watts, MarketWatch

NEW YORK (MarketWatch) — Merger Monday is now often followed by Merger Tuesday, and investors are cheering a long-awaited resurgence in corporate mergers and acquisitions. But is the pickup something for market bulls to celebrate, or does it herald the end of the rally?

“You worry a little bit that MA activity tends to pick up as the market matures, and not in the early stages of a bull cycle,” said Mitch Schlesinger, managing director at FBB Capital Partners in Bethesda, Md.

The pickup doesn’t necessarily signal the end of the recovery or of the bull market, but “you do want to put it in the context of a fairly slower-growth environment where people are either buying growth, or they are consolidating industries because of slow growth,” he said, in a phone interview.

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Topping $1 trillion

There have been 5,844 targeted U.S. MA transactions in the year-to-date valued at $1.04 trillion (see chart above), according to Dealogic. This marks the first year deal volume has topped $1 trillion over that period since 2007. Volume over the same stretch last year totaled $597.8 billion.

Big-time first-half deals include ATT’s

/quotes/zigman/398198/delayed/quotes/nls/t T

 agreement to purchase satellite-television provider DirecTV

/quotes/zigman/11635210/delayed/quotes/nls/dtv DTV

 and Medtronic’s

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 pact to purchase fellow medical-equipment maker Covidien

/quotes/zigman/4475320/delayed/quotes/nls/cov COV

 for $43 billion.

Signs of further activity on the deal front could sway stocks in the week ahead as market participants brace for the heaviest week of results yet for second-quarter earnings season, weigh the outcome of a Federal Reserve policy meeting, and deal with top-tier economic data, including a first look at second-quarter U.S. gross domestic product and the ever-crucial monthly jobs report for July.

While surging MA activity can belie nervousness over the growth environment, it also reflects diminishing unease over potential economic and political pitfalls.

“Everyone we talk to is looking forward, not behind. We’re two more years beyond the ‘08-’09 recession. Not that people have forgotten about it, but they’re more concerned about growth targets than they are about another [round of] financial instability,” said Robert Rubino, head of corporate finance and capital markets at RBS Citizens in Boston, in a phone interview.

Whether that confidence is appropriate only time will tell, but it’s also not the only factor behind the increased volume, Rubino and others say.

Low interest rates, courtesy of the Federal Reserve’s near-zero rate policy, provide for easy financing. Also, the stock market’s relentless rise to new records gives companies hunting for targets plenty of ammunition for share swaps.

Then there are the so-called tax inversions, in which companies seek to merge with a partner from a low-tax country to take advantage of a loophole in the tax code that lets them avoid U.S. taxes. President Barack Obama has called for short-term steps to block inversions.

Lack of froth, so far

John Kvantas, director of equity research at USAA in San Antonio said stocks seem due for a correction given their long run without a major pullback, but he’s not convinced the pickup in MA in particular should sound any alarm bells.


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