By Kate Gibson

The recent spurt in deal making is a small yet encouraging sign for the stock market -- with further acquisitions most likely as defensive plays or in health care and technology, where companies can afford the risk, stock-market analysts say.

"It's possible a lot of these moves are motivated by self-defense, but it's still encouraging that deals are getting done," said Jack Ablin, chief investment officer at Harris Private Bank.

Software titan Oracle Corp. (ORCL) said it would buy Sun Microsystems Inc. (JAVA) for $7.4 billion, or $9.50 a share, after IBM Corp. (IBM) dropped its bid to acquire the computer server and software maker.

The offer topped the $9.49-a-share bid from IBM, which some believe might now target NetApp Inc. (NTAP) for acquisition.

On Monday, Sun Microsystems and NetApp were among the few information-technology companies in the S&P 500 whose shares were up, with Sun rising nearly 37% to $9.15 and NetApp shares advancing 1.1% to $17.79.

Oracle slipped 1.3% to $18.82 a share.

The deal helps, but does not bring M&A anywhere near the level needed for a bull market, said Hugh Johnson, chairman of Johnson Illington Advisors.

"That will come in time and after the recession ends, when cash coffers start to build," said Johnson.

"M&A is a very important missing piece of the current stock market," said Johnson, who adds that companies tend to be cash-strapped during a recession, and even those that have cash are reluctant to use it "even when those other companies reach prices that are very attractive."

In the last four to six weeks "we've begun to see a little more activity when there was essentially none for seven months - I nearly fell off my chair when I saw Rosetta Stone (RST) go public," said Claire Gruppo, managing director of Gruppo, Levey & Co., a New York-based M&A firm and investment bank.

The limited M&A will likely translate into additional job cuts, according to Challenger, Gray & Christmas, an outplacement firm.

GlaxoSmithKline plc's (GSK)$3.6 billion acquisition of Steifel Laboratories announced Monday "will undoubtedly mean redundancies for the pharmaceutical manufacturers," and likely add to the more than 48,000 job cuts by pharmaceutical companies through the first quarter, Challenger said in a news release.

And Sun Microsystems, which announced 6,000 cuts in November, will likely trim further in the wake of its just-announced deal with Oracle, said Challenger, which counts 84,217 jobs lost in the tech sector in the first sector.

Overall, mergers and acquisitions have resulted in 44,379 job cuts so far this year, up 469% from the 7,796 merger-related cuts by the same point last year, according to Challenger.

On Wall Street, financial shares led a broad market retreat. The Dow Jones Industrial Average (DJI) fell 258.86 points to 7,872.47. The S&P 500 Index (SPX) dropped 32.82 points to 836.78, while Nasdaq Composite (RIXF) declined 58.62 points to stand at 1,614.45.

Buyers' market

A willingness to pay cash to finance acquisitions signals confidence on the part of the acquirer that "the worst of the downturn may be behind us, that the worst case scenario of a Great Depression is off the table," said Jeffrey Kleintop, chief market strategist, LPL Financial.

Others voiced more caution.

"While current announced deals are encouraging from the vantage point of consolidation, this is an area of the market that has been a terrible predictor and judge of future equity and economic performance," said Dan Greenhaus of Miller Tabak & Co.

"It is encouraging to see companies buying other companies, but the fact remains that the M&A crowd got it very, very wrong in 2007 and 2008," said Greenhaus.

Paul Nolte, director of investments at Hinsdale Associates, also views the recent spurt in M&A as part of ongoing economic consolidation. And the deals also raise a red flag in terms of companies potentially getting too big, rather than "spreading out, selling off divisions and getting into a position where failure will not adversely affect the economy," said Nolte.

"We see more mergers in the future, but it may not initially be very accretive to those that are purchasing as the overall economic backdrop remains poor and is likely to be so for much of at least this year," he added.

In some cases, the economy's slide is the force driving deals, with not all "getting together out of great opportunity," said Kleintop, pointing to Pulte Homes Inc.'s (PHM) all-stock transaction for Centex Corp. (CTX) earlier this month as an example. "You had two home builders that had to get together just to continue to survive, where consolidating made sense from a cost standpoint," said Kleintop. .

In the current climate it's difficult, if not impossible, to borrow funds to finance deals, so consolidation is likely to take place in health care and technology, "where they have some cash on their books," said Kleintop.

"We've seen a fair number of transactions in the health care space - because financing is difficult, most of the deals are in cash-rich sectors like tech and health care. I haven't seen too many willing partners in the financial space, those deals are motivated by outside forces," said Ablin, who doubts M&A will pickup anytime soon in sectors heavily reliant on capital markets, such as industrials and utilities.

Deals done in down markets tend to be more accretive to the buyers than deals done in over-heated markets, said Gruppo. "People are forced to think more strategically, and they don't have to pay as much. This is a good time to be a buyer."