Yahoo Finanzen Good Outlook for M&A Should Boost Stocks
Just like the 1980s video game Pac-Man, corporations look set to start gobbling up each other this year.
If that happens, and it looks likely to do so, then the stock market should rally. That's because greater numbers of mergers and more acquisitions tend to go hand in hand with gains in the major stock indices, such as the Standard & Poor's 500 index. In short, more deals equal higher stock prices.
A new administration. The Trump administration's policy goals of lower personal and corporate taxes, as well as lighter regulations on businesses, is creating "the most capitalist government we've ever seen," says Don Coxe, chairman of Coxe Advisors.
[See: 9 Ways to Invest in a Post-Election Market.]
On its own those things can help drive faster growth because companies and people should see greater after-tax income.
But there is also something else that a smaller tax burden and decreased regulation does to change things. Such policies lift confidence in the executive suite, and that in turn leads to even more business activity.
"What we will have now is lots of acquisitions by companies who will now be buying other companies due to increased optimism," Coxe says.
When company bigwigs are more optimistic about the future of the economy, they are more likely to splurge on purchasing other smaller companies.
It gets down to a simple question: Why spend money on buying another business if you don't think the future looks bright? That's why the Trump policies will likely lead to a surge in businesses buying each other: The new administration looks set to boost optimism.
How it boosts prices. If your company stock is trading at $100 a share, then the board of directors will surely demand much more than $100 a share in order to accept a takeover offer. Why sell your company's shares for less than the current stock price?
That's an example with just one company. When many companies get taken over, then multiple stock prices get bid higher and higher, so lifting the major indices.
[See: 7 Things That Happened When Donald Trump Met With Tech Leaders.]
Not just big firms. Stocks that are part of the major market indices, such as the S&P 500 or the Dow Jones industrial average, tend to be huge. But not all M&A deals are between mega-corporations. Quite a lot involve smaller companies.
Citizen's Bank recently quizzed 600 C-suite executives of middle-market companies, those between $5 million and $2 billion in annual revenue. More than half (53 percent) of potential sellers are either involved in selling or are open to doing so next year. That's an increase from 34 percent in a Citizen's Bank survey the year before.
"Our survey showed sellers are more optimistic heading into 2017," says Bob Rubino, head of corporate financial and capital markets at Citizen's Bank, in Providence, Rhode Island.
Better still, one in four were "extremely confident" that their organization will be purchased in the next 12 months, the report says.
Of course, every deal requires both a seller and a buyer. There is good news on that front too, with the survey indicating "robust buyer interest."
Almost three in four potential buyers said they were "currently involved in or open to considering making an acquisition," versus 60 percent a year before. Close to one in four showed "extreme confidence" in striking a deal in the next year.
A nuance. While the M&A field may generally heat up this year, there are some important nuances.
"[President-elect Donald] Trump will make it quite easy to do M&A in order to help keep the U.S. competitive," says Suzanne Hutchins, a London-based investment manager at Newton Investment Management, part of BNY Mellon.
The idea behind M&A and staying competitive is that U.S. corporations compete in the global market. Sometimes the only way to compete is to grow big, hence the need to acquire smaller firms.
Given Trump's mantra of "make America great again," it's clear why he would favor corporate takeovers that help keep U.S. companies viable in the world market. However, it's less clear how he'll view takeovers of U.S. companies by foreign entities.
"I think what would be really interesting is what happens when China wants to buy U.S. assets," Hutchins says.
[See: 9 Stocks to Buy for the Aging Baby Boomer Market.]
China is the second largest economy in the world, and hence has a lot of corporate buying power. Allowing unhindered acquisitions of U.S. companies by the communist country might help an M&A boom, but at the same time it may raise national security concerns with the new administration. We'll see whether such matters become a deciding factor.
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