By Kate Gibson
The U.S. stock market's celebration of a renewed burst of
M&A activity proved short-lived Tuesday even as some speculated
that additional suitors will top Xerox Corp.'s $6.4 billion bid for
Affiliated Computer Services.
"The good news is there is ongoing consolidation in computer
services, and you can make an argument this opens the door for
another bidder at a higher valuation, that's good for the broader
market," said Art Hogan, chief market strategist at Jefferies &
Co.
Breaking a three-day losing streak, the major indexes rallied on
Monday on word of Xerox's proposed purchase, along with another
large deal, Abbott Laboratories' (ABT) offer for Brussels-based
Solvay's pharmaceutical unit. .
"With yesterday's roaring stock market rally on the heels of the
deal announcements, the action begs the question, is M&A
activity a precursor to a good market or does it follow an already
buoyant one. I believe it's the latter but a good market can last a
while as can the M&A deals, particularly strategic ones where
growth is tough to come by," Peter Boockvar, equity strategist at
Miller Tabak & Co., wrote in a note.
Those announcements came on the heels of last week's $3.9
billion bid by Dell Inc. (DELL) for Perot Systems Corp. (PER) And
earlier in the month, Kraft Foods Inc. (KFT) made a $16.7 billion
offer for Cadbury PLC.
Mergers had become few and far between as the economic crisis
prompted companies to cling to their cash, and renewed takeover
activity is among the signals that the financial system is on the
mend.
"Why does the market get excited about M&A? It's a signal
corporate America believes things are getting better, not worse.
Companies don't make billion-dollar bets when they the economy is
deteriorating," said Hogan.
Monday's double-digit drop in the would-be acquirer's stock was
an early indication the deal as proposed may not go through, said
Hogan, who added the possible demise of the deal is not necessarily
a bad thing.
The recent spurt of M&A activity marks the beginning of a
cycle that should intensify as "tech companies strive to deepen and
broaden their product offerings," said Hogan.
Titans of Tech
The biggest players in technology in terms of market
capitalization historically have high levels of cash on their
balance sheets, said Hogan. He pointed to Microsoft Corp. (MSFT),
Oracle Corp. (ORCL), Cisco Systems Inc. (CSCO) and IBM (IBM) as
among likely buyers of other companies.
"You don't have to go far to find a pretty big pile of cash for
acquisitions," said Hogan.
Xerox Corp. (XRX) shares on Tuesday rose 4.3%, taking back less
than a third of the market valuation lost in the prior session's
near-15% slide.
Elsewhere in the IT sector, shares of Unisys Corp. (UIS) gained
3.6%, continuing Monday's rise of almost 15%, a surge Hogan
attributed to speculation it too might be targeted for
acquisition.
On Wall Street, the major indexes lost their early footing after
an index of consumer confidence fell unexpectedly, with energy and
information technology shares fronting the decline.
The Dow Jones Industrial Average (DJI) fell 14.96 points, or
0.2%, to 9,774.40. The S&P 500 Index (SPX) stood near flat at
1,063.67, while the tech-laden Nasdaq Composite Index shed 1.92
points to 2,128.82.