MARKET SNAPSHOT: U.S. Stock Market Could Bask In More M&A

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," said Art Hogan, chief market strategist at Jefferies & Co. "That's good for the broader market."

That said, the nearly-ended quarter remains on track to be one of the worst ever for M&A activity, said Marc Pado, U.S. market strategist at Cantor Fitzgerald.

"However, investors are focusing on the trend, and it is safe to say that we are looking at M&A activity that seems to have turned the corner and is about to turn higher," Pado said.

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.

High stakes gamble

"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 the economy is deteriorating," said Hogan.

Monday's double-digit drop in would-be acquirer Xerox'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.

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 3.3%, taking back roughly one-fifth of the market valuation lost in the prior session's near-15% slide.

Elsewhere in the IT sector, shares of Unisys Corp. (UIS) gained 2.7%, 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 information technology shares fronting the decline.

The Dow Jones Industrial Average (DJI) fell 23.05 points, or 0.2%, to 9,766.31. The S&P 500 Index (SPX) stood near flat at 1,063.20, while the tech-laden Nasdaq Composite Index shed 3.31 points, or 0.2%, to 2,127.43.