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The Honolulu Advertiser

Posted on: Saturday, February 5, 2005

Hot merger market indicates healthy economy

By Michael J. Martinez
Associated Press

NEW YORK — The merger market is back.

In what may be the clearest sign of economic health following the dot-com bust and the recession, the mergers-and-acquisitions business is soaring, with deals like Procter & Gamble Co.'s planned $57 billion purchase of Gillette Co., announced last week.

Major deals

Procter & Gamble Co.'s planned $57 billion purchase of Gillette Co. was the largest of the 607 M&A deals announced last month. Among the other big deals:

SBC Communications Inc. plans to buy former parent AT&T Corp. for $15 billion.

MetLife Inc. is buying Travelers Life & Annuity Co. for $11.5 billion from Citigroup Inc.

News Corp. said it will acquire the remaining 18 percent of Fox Entertainment Group Inc. for $5.9 billion.

Cellular giant Alltel Corp. is acquiring Western Wireless Corp. for $4.4 billion.

News publisher Lee Enterprises Inc. is buying newspaper group Pulitzer Inc. for $1.46 billion.

Last month was the best January for merger and acquisition deals since the dot-com era, giving Wall Street a sign that corporate America, flush with cash, has enough faith in the economy to start expanding more aggressively. There were $138 billion in deals in January, the best showing for the month since 2000, according to Thomson Financial. And that follows $147.3 billion in deals in December — which happened to be the best month overall since October 2000.

"What we're seeing right now is the hottest M&A market since the peak years of 1999 and 2000," said Jason Ghassemi, an analyst with FactSet Mergerstat LLC.

But there are some key differences between this merger boom and those of the past. While Wall Street could count on mergers to give it a big lift in the 1990s, stocks had a terrible month in January, with the Standard & Poor's 500 dropping 2.53 percent. Concerns about interest rates, corporate earnings and oil prices outweighed the merger news.

"Certainly the amount of M&A out there has caused a lot of individual stocks to move," said Richard Dickson, senior market strategist at Lowry's Research Reports. "If you're in a rising market, they tend to reinforce the bullishness. But when stocks are under pressure, mergers become more of a sideshow."

And the wave of mergers itself reflects caution among companies — it's actually less risky to buy an existing company than to invest in new product lines.

"Companies are still facing some concerns. Commodity prices are rising, but there's very little pricing power in the economy because of slow job growth and economic growth," said Anthony Chan, managing director and senior economist at JPMorgan Fleming Asset Management. "The least risky thing to do is to start consolidating."

If nothing else, January was still an impressive sideshow. The biggest deal was the P&G-Gillette match, announced at the end of the month.

In total, there were 607 merger and acquisition deals in the United States in January, down from 673 in December, Thomson Financial said. Actually, January was a relatively slow month compared with a monthly average of 691 deals in 2004.

However, what's different is the price tags on the deals — the average monthly value of 2004 deals was just $68.2 billion. This shows that bigger companies are making more aggressive moves and acting with more confidence.

The spate of M&A activity stems from the piles of cash that corporations have been sitting on. Companies drastically slashed jobs and cut costs as the economic recession took hold in 2001 and 2002, hoping to preserve profit margins. That helped increase profits dramatically by 2003, resulting in their huge cash reserves.

"Companies had more than $1 trillion in cash on their balance sheets last year," Chan said. "The problem was that you had a lot of geopolitical things in 2004, like the presidential elections and Iraq, and you were just starting to see signs that the economic expansion would be sustainable."

With the economy stabilizing through the second half of 2004, companies began feeling better about tapping their reserves, and began considering their options — purchasing new equipment for even better efficiency, expanding through new products and services (often with commensurate additions to the payroll) and buying other companies.