Mergers and the Market

With inflation low, many companies look to acquisitions to increase revenues. The trend could boost stocks

By Joseph Lisanti

Remember when banks made business loans, thrifts provided home mortgages and investment banks handled stock issuance? That's when Hollywood made movies and cable operators piped films into the homes of people who didn't want to venture out to the local theater. Today, such specialization is disappearing.

Companies are planning to unite in what, at least recently, seems like merger mania. Some want to control both a product and its distribution, as in proposed media combinations. Others seem to want to broaden the range of what they sell, as in financial services mergers. And in many industries, companies are gaining scale to compete with other giants in the field, as appears to be the case with the wireless telecom business.

One likely reason for the merger rush is that revenue growth is a concern for many corporations in an era of low inflation. When prices in general are stable, companies find it difficult to make their customers pay more. That means revenue growth depends on unit sales gains, which are not always easy in mature industries.

With the job market still soft, we believe that inflation is unlikely to surge anytime soon. Consequently, companies have little cover on price increases, and mergers will probably continue to be in the news.

Acquisition activity tends to support stocks, since shareholders often maintain positions in the hope of being bought out at a higher price. After dipping slightly in late January, the S&P 500 rebounded in early February. It is not inconceivable to attribute at least some of that rebound to takeover hopes.

Mark Arbeter, S&P's chief technical analyst, cautions that an unabated upward move through the first quarter might signal that 2004's highs will be made early in the year. That could result in a more serious correction later. Alternatively, Arbeter says that a 5% dip could give stocks a breather that would help sustain an advance later in the year.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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