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.
Fool contributor Alex Dumortier, CFA, and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.