Has the Market Rally Found Its Next Sponsor?

Stocks were essentially flat today, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) both gaining 0.05%, respectively. The VIX (VOLATILITYINDICES: ^VIX  ) , Wall Street's fear gauge, dropped 2.3%. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

M&A could be the answer
Are mega-buyouts back? Yesterday, PC manufacturer Dell announced that it had agreed to be taken private by its founder Michael Dell and private-equity investor Silver Lake, in a deal valued at $24.4 billion. Today, Dell shares closed at a 24% premium to the closing price on Jan. 11, the last day before rumors of a deal surfaced in the media.

Today, meanwhile, the Financial Times reported that two groups of buyout firms are aligning financing for a potential 10 billion-pound ($15.6 billion) bid for EE, the U.K.'s largest mobile operator. Private-equity heavyweights Blackstone and KKR are facing off as members of the opposing groups. Last month, Dow component AT&T (NYSE: T) was reported to be keenly interested in EE; it has been reviewing potential European acquisition targets and would like to complete a deal before 2013 is out.

If it is successful, the Dell buyout would easily be the largest since the $45 billion acquisition of Texas utility TXU in 2007, at the height of the LBO boom. (One of the co-investors in that deal, KKR, ultimately wrote down its investment by 95%.) In the wake of the credit crisis, banks are no longer willing to finance this type of adventure, but animal spirits appear to be on the rise as markets normalize. Certainly, it's not for want of their own means that buyout firms have been inactive: As consulting firm Bain & Company pointed out in its Global Private Equity Report 2012, "the industry remains awash in commitments, with nearly $1 trillion in dry powder still waiting to be put to work."

And let's not forget that private-equity firms are not the only hunters out there -- the S&P 500 had more than a trillion dollars in cash and cash equivalents of its own on its balance sheets at the end of the third quarter ($1.2 trillion, to be precise, although the entire amount is not available for acquisitions, naturally). 

Equity prices don't appear particularly cheap right now, but there are certainly good reasons to believe the current market rally can continue, and an increase in merger activity is one of them.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2240924, ~/Articles/ArticleHandler.aspx, 10/25/2014 11:50:46 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement