By Michael Brush
MSN Money features J. Gregory Barrow
The megabuck merger is back on Wall Street. What are the pros and cons of mergers?
What are the pros and cons of mergers? It’s still not where it was two years ago, before the market’s meltdown brought activity to a near-standstill.
But a steady drumbeat of multibillion-dollar deals in the last few weeks — including Dell’s (DELL, news, msgs) proposed takeover of Perot Systems (PER, news, msgs), Xerox’s (XRX, news, msgs) bid for Affiliated Computer Services (ACS, news, msgs) and Walt Disney’s (DIS, news, msgs) takeover of Marvel Entertainment (MVL, news, msgs) — shows it’s party time in the takeover market again.
This trend is crucial for three reasons:
- First, it shows that top executives and board members — the folks who know the economy best — are bullish again. “You don’t look to be bigger unless you’re optimistic,” says Uri Landesman, a senior portfolio manager at ING Investment Management. In short, this is a sign the economy may be stronger than a lot of investors believe. “It’s very, very meaningful,” says Landesman.
- Next, it shows that despite the 50%-plus rise in stocks since the March low, stocks are still reasonably priced — at least in the eyes of corporate buyers who don’t like to overpay.
- Third, when you own the right takeover stock, the payoff can be huge. Shares of Perot Systems jumped 66% on news that Dell wanted to buy. The short-term profit can easily be in the 50% range — often reaped in a single day.
These expectations support a sustained bull market, because it means investors will hold on to stocks as they move higher on the chance the company will get bought, says Landesman.
Jefferies & Company analyst Joseph Vafi believes a bidding war will break out for Xerox target Affiliated Computer Services as potential suitors like International Business Machines (IBM, news, msgs) and Hewlett-Packard (HPQ, news, msgs) step in to compete for the prize.
For investors, speculating in takeover targets can be tricky. It should never be the only reason you own a stock. Still, it’s tempting, so I’ve come up with 25 potential buyout candidates in four sectors.
Before we get to that, let’s settle a little debate: How much has the level of mergers and acquisitions — M&A — activity picked up?