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Deals spur recovery talk, boost stocks
Question of the Day
NEW YORK | A burst of corporate dealmaking is giving investors a shot of confidence about the economy.
Stock indexes rose more than 1 percent Monday to post their biggest gains in about a month, breaking a three-day slide. The Dow Jones Industrial Average jumped 124 points, recouping much of what it lost last week.
Large acquisitions from Abbott Laboratories and Xerox Corp. vaulted shares of drugmakers and technology companies higher, and the buying spread to other parts of the market as investors hoped that the $6 billion-plus deals could be a sign that deal activity is finally picking up a year after the financial system nearly froze.
A resumption of corporate-takeover deals would represent an important milepost in the economy’s recovery. Companies had grown so worried in the past year that they were hesitant to part with cash and often had trouble lining up financing.
A willingness by big companies to wager stock and borrow cash to bulk up their business also sets off a guessing game among investors about what the next takeover targets might be. Just last week Dell Inc. said it would acquire technology company Perot Systems Corp. for $3.9 billion, and earlier this month Kraft Foods Inc. made an overture for candy maker Cadbury PLC for $16.7 billion - the latest signs that big-time dealmaking could be staging a comeback.
Stocks have surged since March as investors jockeyed to stay ahead of a strengthening in the economy, but the pace of those gains has stirred worries that the market is overestimating the strength of the economy. The willingness of some companies to pursue deals is helping ease some of those worries and reassuring investors that credit is flowing again.
“It’s encouraging to all investors when you see companies buy, because basically what that says is, they’re in a more aggressive mode, as opposed to being in the fetal position,” said Mark Coffelt, portfolio manager at Empiric Funds in Austin, Texas.
The Dow rose 124.17, or 1.3 percent, to 9,789.36, its biggest gain in more than a month. Last week, the Dow lost 155 points following lackluster reports on housing and manufacturing.
The broader Standard & Poor’s 500 Index rose 18.60, or 1.8 percent, to 1,062.98, and the Nasdaq Composite Index rose 39.82, or 1.9 percent, to 2,130.74.
Abbott Laboratories said Monday that it would acquire the pharmaceutical business of Belgian chemicals maker Solvay for $6.6 billion, while Xerox Corp. agreed to buy Affiliated Computer Services (ACS) for about $6.4 billion.
Charlie Smith, chief investment officer at Fort Pitt Capital in Pittsburgh, said some money managers and other professionals are racing to catch up with the market’s advance before the third quarter ends on Wednesday.
“The mistake that people are afraid of now, versus six months ago, is not having enough money in the market,” he said. “It’s a sentiment swing.”
Abbott Laboratories rose $1.25, or 2.6 percent, to $48.58. Abbott’s purchase of Brussels-based Solvay gives the company access to emerging markets in Eastern Europe and Asia, along with new therapeutic areas such as the fast-growing market for vaccines.
Johnson & Johnson Inc. said it bought an 18 percent stake in Dutch biotechnology company Crucell for $440 million in hopes of developing a universal flu vaccine.
Xerox’s deal for ACS set off a rally in other information-technology companies. Accenture PLC and Unisys Corp. rallied.
By Andrew P. Napolitano
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