« Previous |
Main
| Next »
May 22, 2007 The Power of a Strong M&A Market
As the strength of the current M&A market continues, many may be wondering what kind of impact will be felt on the market as a whole. While it is impossible to predict how the markets will react to specific M&A transactions, they do appear have a general impact. For example, the recent announcement that Bausch and Lomb will be taken private in the coming year means there is a wave of cash that will be looking for a new home. And while Bausch and Lomb may be the most recent announcement, according to Justin Lahart of the Wall Street Journal (Taking Stock: How Buyouts Alter the S&P, 5/17/07) there are a total of 12 companies in the S&P 500 index set to go private this year alone. Standard & Poor's analyst Howard Silverbratt estimates the total price tag for these 12 companies weighs in at an incredible $179 billion. So where does this cash go and how does it impact the market?
For starters the S&P index funds and actively managed mutual funds, which use the index as a benchmark, will be investing the money from the buyouts right back into other stocks in the index. But considering the size of the buyouts of the largest companies being taken out of the index, and the smaller companies that will be replacing them, much of the cash will be divvied up among all the companies in the index. This is due to the fact the S&P 500 index is market-cap weighted. So if a company, which accounts for 1.0 percent of the total index is replaced by a one that will only account for 0.5 percent the remainder of the cash would be divided among the other companies in the index. This could help send the market higher and is one example of how a strong M&A market can help the overall market.
The second and more easily identifiable way is simply the law of supply and demand. The reality is that all of the cash coming into the market from a buyout was already in the market to begin with. So with so many companies going private there are simply fewer stocks to buy, which in turn, drives the ones that remain higher. Of course, to the average investor these mechanics may mean little. However, as the overall market continues to climb investor confidence climbs with it.
TrackBack URL for this entry:
http://www.quistvaluation.com/mt/mt-tb.cgi/81
