Takeover talk seen as sign of recovery's strength

Monday, February 16, 2004

NEW YORK -- Comcast Corp.'s bold proposal to take over Walt Disney Co., following a string of megadeals in the financial, health-care and technology sectors is the latest signal to investors that the nation's economic engines are humming once again.

Propelled by advancing stock prices, low interest rates and rising confidence at the corporate level, the deal-making seems to be accelerating. And when companies make big bets, analysts say, it makes everyone in the market more courageous.

"It's almost like another economic stimulus," said Bill Groenveld, head trader for Finance Investments. "People figure, if the big money is ready to play up here ... we're still in a safe environment. That's what I saw on the trading side. A lot of smiles across the board."

Global merger activity slowed considerably during the bear market, when would-be acquirers often lacked the necessary cash and potential targets were reluctant to be purchased at such low prices.

Pent-up demand

Comcast's $54 billion bid -- which Disney is working to rebuff -- is part of a growing wave of merger activity. Including the Comcast offer for Disney and the pending $58 billion merger of J.P. Morgan Chase & Co. and Bank One Corp., there have been $170 billion in bids and deals announced so far this year, according to Thomson Financial. By comparison, only $70 billion were announced in the entire first quarter of 2003.

"There's a tremendous amount of pent-up demand, and it's just continuing to come back," said Scott Adelson, senior managing director at Los Angeles investment bank Houlihan Lokey Howard and Zukin. "This year you'll see more megadeals ... the kind that transform companies."

With strong earnings, positive cash flow and the ability to borrow at record-low rates, large companies are increasingly optimistic. They're looking to make capital improvements, new hires and acquisitions.

"We went, in very rapid short order, from deep pessimism and an unwillingness to make investments a year ago, to a situation where companies are more willing to make investments, they're looking out across the horizon for new opportunies, and they have the resources to do it," said Kevin Caron, market strategist with Ryan, Beck & Co.

"These are all confirming signs that the recovery currently under way is real, is sustainable and is accelerating," he said.

Two quarters of grand deal-making promises to transform the financial sector. Bank of America Corp. announced plans in October to acquire FleetBoston Financial Corp. for $47 billion in stock, creating the nation's third-largest bank. And the proposed merger of J.P. Morgan Chase and Bank One, announced Jan. 14, would make it second only to Citigroup in terms of assets.

The consolidation continued a week later, when Regions Financial Corp. and Union Planters Corp. agreed to combine forces in a $6 billion merger, creating a Southeastern powerhouse and the nation's 14th-largest bank.

Adelson and other investment bankers are also watching telecommunications and technology. AT&T Wireless Services Inc., the third-biggest cellular provider in the United States, put itself up for sale last month, and Juniper Networks Inc. recently announced plans to buy security company NetScreen Technologies Inc. for about $3.5 billion in stock.

The health-care sector saw the trend begin in October when benefits insurer Anthem Inc. purchased bigger rival WellPoint Health Networks Inc. for about $14.3 billion in cash and stock. Last month, French drug maker Sanofi-Synthelabo SA unveiled a $60.2 billion hostile bid for larger rival Aventis SA -- a combination that would create the world's third-largest pharmaceuticals company, behind U.S. giant Pfizer Inc. and Britain's GlaxoSmithKline PLC.

Growing appetite

The appetite for mergers is growing, but the fact that most of the recent deals have involved stock, rather than cash, could limit their broader impact, said Richard A. Dickson, senior market strategist with Lowry's Research Reports.

Stock prices tend to rise in cash deals because shares are actually taken out of the market after they're purchased. Stock deals "are kind of a wash" in that regard, Dickson said.

"It helps because it gets people thinking corporations have money to spend, and that has a salutory effect on investors' psyches," Dickson said. "But from what we've seen, it's questionable right now whether that sort of thing can change the overall psychology of the market."

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