MARKET SNAPSHOT: 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 M&A 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.

Topping $1 trillion

There have been 5,844 targeted U.S. M&A 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 AT&T's (T) agreement to purchase satellite-television provider DirecTV (DTV) and Medtronic's (MDT) pact to purchase fellow medical-equipment maker Covidien (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 M&A 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 M&A in particular should sound any alarm bells.

Kvantas and others noted that the current round of M&A has often seen the prices of shares of the acquiring firm rise alongside the price of the target. Typically, in other M&A cycles, the price of the acquirer would drop, while the price of the target would rise. The current phenomenon is often taken as a sign prices for deals aren't terribly out of whack and that the cost-savings assumptions penciled in by the companies are within the realm of reason.

"When things get a little more frothy on the M&A side, that's when you get a little bit more concerned that companies and investors are starting to push the envelope," Kvantas said in a phone interview.

Earnings deluge, data and the Fed

Meanwhile, next week brings a flood of earnings, including results from Twitter Inc. (TWTR) on Wednesday, Exxon Mobil (XOM) on Thursday, and Berkshire Hathaway (BRK/A) on Friday.

Of the 230 companies in the S&P 500 that had reported earnings through Friday, 76% topped earnings forecasts, while 67% beat sales estimates, according to FactSet.

Wall Street turned in a flat-to-weaker performance last week, with the Dow Jones Industrial Average (DJI) slipping back below the 17,000 level to post its biggest weekly decline in six weeks. The S&P 500 (SPX) ended the week virtually flat after notching another record earlier in the week, and the Nasdaq Composite (RIXF) gave back 0.5%.

The economic calendar is packed. On Wednesday, investors will get ADP's take on private-sector payrolls at 8:15 a.m. Eastern, followed by second-quarter GDP data at 8:30 a.m. and the Federal Reserve's policy statement at 2 p.m.

Thursday sees weekly jobless claims, while Friday brings the July jobs report. Economists surveyed by MarketWatch look for nonfarm payrolls to rise 228,000 after an increase of 288,000 in June.

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