M&A and Stock Trade Today

In observing the stock market activity today, I think the emphasis on merger and acquisitions is way overdone.

While companies might use surplus cash for acquisitions because this approach is a sure way to increase revenue, there are additional risks in that the vast majority of mergers never live up to initial expectations. The synergies between two merged companies are always slow to develop.

The following WSJ article hints at the downside of M&A:

Yesalavich, Donna Kardos (2010), "Stocks Drop As Deal Euphoria Fades," The Wall Street Journal, Aug. 23.

For example, the following quote:

"'You had this marginal euphoria, and now people are saying [M&A activity is] very specific and has nothing to do with core earnings and economic fundamentals,' said Barry Knapp, managing director of equity research at Barclays Capital. 'The macro economic outlook has deteriorated significantly.'"

I view the development that major corporations might consider M&A as a way of using surplus cash to be an indication of a weak global economy. Firms have decided that revenue will not expand through direct investment thus M&A is the only alternative. This is not a positive thing.

This quote from the above article supports my view:

"At a time when economic data have been disappointing, the unexpected pop in deals gave investors some hope that U.S. public companies were finally getting confident enough to start putting their $2.03 trillion in cash and short-term investments to work. However, economic data have continued to come in weak."

The fact that about 4% of US total wealth is in cash held by corporations is a major story in of itself. This represents an extremely conservative corporate policy and reflects the structural weakness of the US economy and the uncertainty about global economic prospects.