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Think Big Buyouts Are Back? Think Again.

There were high hopes back in February that we were amid a new kind of merger mania on Wall Street.

  • Warren Buffett and Berkshire Hathaway (NYSE:BRK.ABRK.B) teamed up with 3G Capital to purchase consumer staples icon H.J. Heinz (NYSE:HNZ) for $23 billion.
  • Liberty Global (NASDAQ:LBTYA), a broadband service provider, announced a $16 billion plan to buy Virgin Media (NASDAQ:VMED).
  • American Airlines parent AMR Corp. (PINK:AAMRQ) announced a deal to merge with US Airways (NYSE:LCC) for $11 billion.
  • Comcast (NASDAQ:CMCSA) decided to purchase the rest of NBCUniversal from General Electric (NYSE:GE) for $16.7 billion.

But since then, the dealmaking vibe has all but disappeared on Wall Street — raising concerns that the mergers and acquisition business is stuck in first gear after a very volatile market and macroeconomic overhang relating to Europe, U.S. employment, China and other issues.

The issue is partially a global concern, with worldwide dealmaking falling substantially; as reported in a Tuesday Dealbook report by Michael J. de la Merced, “Only 8,115 deals were announced worldwide in the first quarter of this year, the lowest number since 2003, according to data from Thomson Reuters.”


But it’s also worth noting that U.S. merger and acquisition activity remains particularly sluggish — especially considering how deals increasingly are being driven by players abroad instead of in the once-dominant U.S. capital markets. In Q1, for instance, global deals outside the U.S. totaled more than America’s M&A activity by a hair.

So what gives? A broad-based rally for the markets, sending both the Dow Jones and S&P 500 to new highs, should give buyers confidence. So should a generally improving economy with lower jobless numbers, a rebounding housing market and other encouraging data. Most importantly of all, the ZIRP tactics of the Federal Reserve means there’s no incentive to saving and that financing for big-ticket deals is super cheap and readily available to prospective buyers.

If you’re going to make a deal, now would be the time.

… except for those little concerns like an EU breakup thanks to Cyprus, continued chatter of a China housing bubble and worries that a dysfunctional Congress could impede any domestic recovery.

The problem is an old one on Wall Street: Do you buy the rally and hope for the best, or do you sit on the sidelines until the dust settles even if that means missing out?

In a few cases, big buyers have dived in. But in the vast majority of others, cash-rich companies are prepared to bide their time — even if it means they are just treading water.

According to Moody’s, U.S. non-financial companies held $1.45 trillion in cash at the end of 2012, up 10% from the record level of $1.32 trillion at the end of 2011. That includes Apple (NASDAQ:AAPL) with about $140 billion all by itself.

Sure, a company like Apple could theoretically use a shrewd deal right now to breathe life into its struggling stock. But if there are bigger macro concerns that would render any deal meaningless … well, why bother?

In other words, if the recent spate of deals to start the year was seen as a bullish sign, then the current M&A drought is just as important an indicator in the other direction.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.

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