Mon 20 Nov 2006
I woke up this morning and saw the following headlines:
- Freeport McMoRan to buy Phelps Dodge for $26b
- Blackstone to buy Equity Office for $20b
- Nasdaq ups bid for LSE to $5b
Mergers and acquisitions are running at $3.1 trillion this year, a truly astounding number.
So, what are the implications to the rest of us? Those of us who didn’t own PD, EOP, or LSE before this mornings news?
One immediate beneficiary is the major brokers and investment banks. With any public action like a buyout or an IPO, they rake in enormous fees for helping to facilitate the deal. There’s a high probabiliy to see IAI (iShares Broker-Dealer Index) to continue higher, or at least several of the individual brokers in the index.
According to TrimTabs theory, a large part of market direction is determined by corporate buyouts like this. Stocks are subject to the laws of supply and demand just like a commodity, though in this case the demand comes from corporate insiders buying and from mergers and acquisitions like this.
The theory goes something like this. Suppose you’re a REIT mutual fund manager and your fund owned $20 million of EOP which was just bought out by Blackstone. First, you’re sitting on a nice jump this morning in NAV because of the buyout. Celebrate! Ok, now that you have finished calculating next year’s bonus and planning for your second house in the Hamptons… you have $20 million to invest in other REITs, and pronto if the market is going up. You’re not allowed to just let that money sit in cash, and you certainly look like a boob if you under-perform when the market is going up. So, your decision is pretty easy — Buy More REITS!
TrimTabs runs an information service which I’m currently mid-free-trial. They are unabashedly bullish, and cite the amount of M&A cash buyout deals this year as one of the primary causes of the continued rally in the broad stock market. One of the catches is that cash-based buyouts are more powerful that ones accomplished by issuing more stock. If you receive cash from a buyout, you have to find somewhere else to invest it.
We can use the amount of M&A activity to gauge the risk appetite for big money (most of the buyouts use leverage, which is a bit risky), and the availability of easy credit. You can’t have big deals like this without a healthy appetite for risk and large lines of credit.
If the TrimTabs theory holds, we should see continued strength in the stock market with today’s record-breaking M&A activity and continuing buyout announcements.