The Next Plank in This Bull Market

Full steam ahead!

Alex Dumortier
Alex Dumortier, CFA
Feb 15, 2013 at 10:15AM

On the back of yesterday's small gains, stocks opened narrowly higher this morning, with the S&P 500 (SNPINDEX:^GSPC) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES:^DJI) up 0.18% and 0.19%, respectively, as of 10:05 a.m. EST.

Full steam ahead!
Last week, this column asked whether the market rally had found its next sponsor in mergers and acquisitions. That hypothesis looks increasingly appealing. Yesterday's announcement that Berkshire Hathaway (NYSE:BRK-B) and 3G Capital will acquire H. J. Heinz in a deal valued at $28 billion reflects a return of animal spirits in corporate boardrooms that mirrors the enthusiasm that has pushed the stock market to within 3% of its all-time nominal closing high.

The numbers tell it straight: We are now midway through the first quarter, with 2,336 announced transactions for a total deal value of $198 billion. Compare that to the same period last year, during which 2,043 transactions were announced with a total deal value of just $77 billion. Notably, the number of transactions valued at more than $1 billion jumped from 17 to 27.

In fact, in terms of deal value, this year's running tally is comparable to the one at the same point in 2007 ($212 billion) -- the heyday of a credit-fueled buyout boom. The comparison doesn't stop there, either, as cheap credit is also one of the catalysts of the current M&A boom. The structure of Berkshire's Heinz deal is evidence of that: At first glance, the price tag looks expensive, but as one examines the transaction details, the numbers hold up to scrutiny.

Cheap credit alone doesn't explain everything, however. The rise in deal activity is fueled by two other factors: Cash-heavy balance sheets (whether at corporate or financial acquirers) and a temporary lull in macroeconomic uncertainty. The former is a stable variable, while the second looks a lot more fickle. Are corporate chieftains navigating safe waters, or is this an iceberg field? That remains to be seen, but for the time being, the course is set and it's full steam ahead!