A round of M&A activity provided the impetus for further gains on Wall Street this afternoon as investors turned more optimistic on the outlook for the global recovery.
M&A activity lifts stocks
There was a string of mergers and acquisitions (M&A) activity this afternoon, which lifted spirits on Wall Street. Diversified industrial Danaher Corporation agreed to buy biomedical testing company Beckman Coulter for $6.8 billion, or $83.50 a share. The deal will include the company’s debt and is expected to close in the first half of 2011. Shares in Beckman Coulter jumped 9.63% to $82.41, while Danaher rose 3.79% to $49.80.
Struggling internet service provider AOL announced a $315 million deal to buy fast-growing website The Huffington Post. The purchase allows AOL to move into the media content provider space as the company removes itself from the ailing dial-up internet business. It will also provide a wider customer base for attracting advertising revenue, an area in which AOL has been falling behind rivals like Google. CEO Tim Armstrong said that ‘I think this is going to be a situation where 1 plus 1 equals 11.’ Shareholders were not as optimistic, however, with shares in AOL dropping 3.1% to $21.26.
Lastly, oil drilling company Ensco revealed plans to buy sector peer Pride International for $7.3 billion, which would make Ensco the second-largest offshore drilling company in the world. Ensco will pay $15.60 a share and is expected to be immediately earnings accretive. Shares in Pride jumped 17.16% to $40.29, while Ensco suffered a 3.51% decline to $52.50.
Generally speaking, M&A activity tends to pick up when companies are optimistic on the outlook for the economy. After many companies shored up their balance sheets to weather the financial crisis, they are now sitting on ample cash, which they must put to work. Companies can either use the cash to invest in organic growth, make strategic acquisitions to grow inorganically, or return cash to shareholders, if they have no better growth options. For mature companies that may be reaching their peak, investment in organic growth may not maximise shareholder return as compared to making acquisitions. The fact that M&A activity is increasing bodes well for the economy, as it suggests that businesses are confident that the environment is right to take more risks and invest in future growth.
US equities
By 3.20pm (London time) the Dow Jones Industrial Average was 55.74 points higher (+0.46%) at 12147.89, the S&P 500 added 7.4 points (+0.56%) and the Nasdaq 100 rose 9.11 points (+0.39%) to 2347.31.
Bank of America gained 1.47% to $14.50 after the company reported after the closing bell on Friday that it will be creating a new foreclosure unit to handle the bank’s problem loans. The separate unit effectively splits the bank into two parts, one part which holds the good loans and the other controlling the bad loans. The move will help Bank of American deal with legacy issues, which the current CEO Brian Moynihan inherited when he took over the helm in 2010. Elsewhere in the banking sector, Wells Fargo added 1.3%, Morgan Stanley climbed 1.47% and JPMorgan Chase rose 0.78%.
Computer maker Hewlett-Packard rose 1.75% to $48.26 after the company unveiled a new reclining touch-screen desktop to try and take market share away from Apple’s iPad. Dubbed the ‘Touchsmart’, the computer will be targeted towards retailers, hotels and healthcare workers but is still priced above the iPad at $900.
Pharmaceutical giants Pfizer and Merck &Co both declined this afternoon as the outlook for the sector remains challenging due to US healthcare reforms and competition from generics. Pfizer was down 1.04% to $19.10, while Merck & Co fell 0.24% to $32.81.
UK equities
The FSTE 100 climbed 49.86 points (+0.82%) to 6047.24, while the broader FTSE 250 added 114.62 points (+0.97%) to 11781.15.
It was a broad-based rally on the FTSE this afternoon with, resource stocks higher, but many other sectors also performing strongly. Miners Xstrata and Rio Tinto gained 3.56% and 2.06% after commodity prices continued to rise and copper hit a fresh high. Energy companies were also firmer this afternoon, with Essar Energy rising 2.21% and Cairn Energy adding 1.5%.
Defence company Cobham gained 3.74% to 216.5p after it announced the completion of its acquisition of Corp Ten International for $11.5 million. Rival BAE Systems added 0.95% to 340.1p this afternoon, after the company secured a $47 million contract to modernise its Bradley Fighting Vehicle.
Forex
The US dollar was supported this afternoon by rising US Treasury yields. US ten-year Treasury yields rose to 3.67%, while ten-year notes rose to 0.78%. Treasury yields have been on a steady rise since the start of February and jumped higher on Friday, following the jobs report, which showed the US unemployment rate falling to 9%. The US dollar index gained 0.29% to 78.274.
The euro was down 0.29% to $1.3522 against the US dollar. The euro has struggled to make ground following ECB President Jean-Claude Trichet’s comments last week, which quashed any hopes of a near-term interest rate increase. Trichet made it clear that while inflation may rise in the short term, the central bank feels that the current interest rate is at the right level and that downside risks remain in the economy. A larger-than-expected drop in German factory orders also saw the common currency fall out of favour with investors, after orders fell 3.4% in November.
Sterling pared earlier gains to trade almost unchanged for the day at $1.6103. Speculation over whether the Bank of England will lift interest rates will likely dictate movements in GBP/USD this week. The central bank meets on Thursday to make its latest interest rate announcement, and while it is expected that rates will remain on hold, there is the chance that additional policymakers may vote for a rate hike. The Institute for Economic Affairs was reported to have voted by five votes to four in favour of an immediate interest rate increase on Sunday.
Looking ahead
Shortly after midnight (London time) the BRC retail sales monitor and RICS house balance will be released in the UK. The RICS house balance is expected to improve slightly to -38% in January. Natural gas provider BG Group will be reporting at 7am. BG Group is featured in our Share Focus, for investors interested in finding out more about the company before they report tomorrow.
Germany’s industrial production for December is reported at 11am, with economists expecting the gauge to rise to 11.5%.
In the US, the IBD/TIPP economic optimism survey will be published at 3pm, which may show business confidence rising to 93.8.
