By Tomi Kilgore
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- The announcement of a $1.4 billion merger agreement at a hefty premium was a bright spot in an otherwise dreary Monday on Wall Street, and may have sparked some hope that merger and acquisition activity will pick up sooner rather than later.
"I really doubt it," said Brian Gendreau, investment strategist at ING Investment Management.
He said that although companies may be sitting on record levels of cash, and although stock prices may appear relatively and historically cheap, companies would have to be pretty brave to undertake a major acquisition in the current environment, especially given that the credit market is still very tight.
On Monday, drug maker Abbott Laboratories (ABT) said it was moving into the vision business by buying Advanced Medical Optics Inc. (EYE) in a cash deal that valued Advanced Medical's shares at more than double where they closed Friday.
In addition, blue chip drug makers Merck & Co. Inc. (MRK) and Pfizer Inc. (PFE) have indicated that they can, and may, jump into the M&A fray, and Exxon Mobil Corp. (XOM) is seen tapping its cash horde to acquire a rival energy company.
But just because a company can make an acquisition doesn't mean it will, or even should.
Tom Sowanick, chief investment officer at Clearbrook Financial, said if companies really do have the cash to spend on acquisitions, a better use of it would be to "buy back their own shares at rock-bottom prices" and to further clean up their balance sheets than to acquire more capacity.
"There's plenty of excess capacity out there. Why add more?" Sowanick said.
Given recent history, Gendreau doesn't expect M&A activity to pick up "until well into the recovery" in the economy.
Merger and acquisition volume peaked at $545.9 billion in the second quarter of 2007, according to data provided by Dealogic, a full six months before the official start of the current recession in December 2007. In comparison, M&A volume hit a low of $115.2 billion in the fourth quarter of 2008.
For the year, M&A volume was $1.08 trillion in 2008, down 31% from 2007, according to Dealogic.
The previous cyclical trough in annual M&A volume occurred in 2002 when volume fell to $471.9 billion, Dealogic said, while the previous recession bottomed out in November 2001, according to the National Bureau of Economic Research. Volume improved slightly in 2003, but it didn't recover significantly until 2004 and beyond.
Clearbrook's Sowanick said that if an M&A trend was to develop in the health care sector, it would be more on a "need to have," rather than "nice to have" basis. He feels some of the companies in the sector "have their backs against the wall" and have no choice but to pursue a short-term bump to earnings growth through acquisitions rather than risk funding a new idea.
-By Tomi Kilgore, Dow Jones Newswires; 201-938-2429; tomi.kilgore@dowjones.com
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