NEW YORK (AP) The rise in merger and IPO activity is only good news for the stock market or so investors may mistakenly think.
It's true that when those kind of deals pick up, it makes corporate managers appear more confident, more willing to take on risk, and ready and able to start growing their businesses again.
But investors shouldn't get too giddy over what this really means for Wall Street. In fact, it may be more of a warning sign than a welcome development.
Merger activity slowed considerably during the bear market, when would-be acquirers often lacked the necessary cash to dive into new deals and their potential targets weren't interested in being purchased for deeply reduced prices.
Not any more. Big dealmaking is back, largely due to the resurgence of both stock prices and the economy in the last year. Also factoring into this surge are extraordinarily low interest rates, which allow companies to easily borrow money to fund these deals, and the turnaround in corporate earnings.
There have been more than $250 billion in deals announced so far this year, on top of $213 billion in the final quarter of 2003, according to Thomson Financial. That puts the volume of merger deals at the high end of the historical averages, excluding the rampant and some say irrational period during the late 1990s market boom.
Just consider some of the most recent super-sized deals. There's Comcast's $54 billion hostile bid for Disney, Cingular Wireless' $41 billion deal for AT&T Wireless and J.P. Morgan Chase's $60 billion offer for Bank One. Sectors that have been particularly busy with merger activity include financial services, health care and technology.
There has also been a rebound in initial public offerings. IPOs dried up after the bull market went bust four years ago, with companies unwilling to issue shares at a time when investor demand for stocks in general was tepid.
Now, the gains on Wall Street have revived IPO business. So far this year, there have been 23 deals totaling $6.7 billion, and that follows a very strong run-up in IPOs during final quarter of last year, according to IPOhome.com, a division of Renaissance Capital in Greenwich, Conn.
In investing circles, it is often thought that when companies are willing to make big bets whether through acquisitions or public offerings it makes everyone playing the market more courageous.
But should they be?
''Don't get too excited that the M&A and IPO business have spiked higher. That is not an indicator that there will be a new step up in the market,'' said Tobias Levkovich, senior institutional equity strategist at Citigroup's Smith Barney division.
Levkovich looked back in history to see how the volume of merger deals moved with the broad market, and he found that good times for dealmaking are often closely aligned with peaks in stock prices. In fact, trends in the merger market over the last 20 years tend to run just ahead of the Standard & Poor's 500 index.
The same goes for IPOs. The volume in new stock offerings appears to crest a few months before financial stocks hit a peak, and financial stocks generally trade in line with the overall market, Levkovich's research found.
If history does repeat itself, the outlook for the market could dim in the coming months. We might even be seeing a bit of a pullback right now with the market's recent declines, though it is too soon to tell whether this is just a blip or a new direction for stocks.
Whether or not the peak has already been reached, it's important to understand that merger and IPO mania doesn't necessarily point to better times ahead.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
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