Why M&A Activity Is Heating Up

The markets have been taking a beating over the past few weeks. Plunging existing home sales, disappointing jobless claims and weak manufacturing activity numbers are to blame.

However, as you can see in the chart below one of the “positives” is the rising number of mergers and acquisitions (M&A) in July and August.

Some of the billion-dollar-plus deals include:

• First Niagara Financial Group, Inc. agreeing to acquire NewAlliance Bancshares Inc. for $1.5 billion in the biggest merger of U.S. lenders since October 2008,
• Dell Inc. offering to buy 3Par Inc. for about $1.15 billion, as a way to boost its growing corporate data-center business. Then it sweetened the deal after Hewlett-Packard made a $1.6 billion offer,
• Korea National Oil Corp. making a hostile $2.9 billion bid for U.K. explorer Dana Petroleum Plc.,
• Pactiv Corp., the maker of Hefty trash bags, agreeing to be bought by Rank Group Ltd. for about $6 billion,
• Intel agreeing to pay $7.68 billion for McAfee …

And of course the one that stands out most is:

BHP Billiton Ltd.’s whopping $40 billion hostile bid for Potash Corp. of Saskatchewan Inc., which could make 2010 the busiest year for natural resources deals.

This much M&A activity typically suggests a healthy corporate environment where companies can leverage their success into expansion.

But These Are Not Normal Times,
and These Are Not Normal Markets

One key reason we’re seeing a good number of acquisitions is that interest rates are so darn low the stronger companies are able to issue dirt-cheap debt and easily find willing buyers. Then these companies can put on their predator hat and go on the hunt for vulnerable peers.

Of course many of their peers have beaten-down share prices that reflect the current, weak economic conditions. The net result: A lot of good companies that would have remained independent in a healthy economy with normal credit markets will be absorbed into the few companies with the strongest credit or cash positions.

So this is a great time for companies with access to the credit markets or a strong cash position. Unfortunately for much of the rest of corporate America, it’s time to hide under a rock.

I continue to see an active M&A environment going forward. So I believe you should consider a long M&A trade or two for your portfolio.

In fact, I am spending much of my time right now looking for potential acquisition targets. And I expect to be giving my Manera’s Universal Speculator members one or two potential trades in the coming weeks, as well as a high-probability currency trade.

Best wishes,

Jeff Manera
Editor, Manera’s Universal Speculator

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