Pickup in Deal Activity Another Catalyst for the Market: Dell Inc. (DELL), H.J. Heinz Company (HNZ)

Dell Inc. (NASDAQ:DELL)
As of the close of trading on Friday, March 8, the S&P 500 had already surged almost 9% in 2013 and the Dow Jones Industrial Average was sitting at new all-time highs. Investor confidence has also picked up substantially, sending the CBOE Volatility Index down near 52-week low levels.

Global Liquidity a Market Catalyst

Thus far, the bullish thesis for 2013 which was laid out by top investors such as Appaloosa Management’s David Tepper and Bridgewater Associates Ray Dalio has played out on cue. They argued that the economic landscape was suited for a shift into riskier assets at the beginning of the year due to a confluence of circumstances. Specifically, continued stimulative monetary policies on the part of global central banks has created significant excess liquidity in the financial system.

This excess liquidity is finding its way into the stock market as conditions in Europe have improved, domestic economic reports have been strengthening, and investors who were overweight fixed income shift capital into risk markets. In recent weeks, these trends have been accelerating along with the performance of the major averages.

On Friday, the nonfarm payrolls report showed that the U.S. economy added significantly more jobs in February than economists had expected. Furthermore, money has been pouring out of bonds as evidenced by a nine basis point rise in the 10-Year Note yield over the last month alone.

Nihon M&A Center Inc. (TYO:2127) Could be the Next Catalyst

Another catalyst for the market, however, that some investors may be overlooking, is the pickup in M&A deal activity during the first couple of months of 2013. The current environment remains ripe for deals, and this should continue to help boost equity prices along with sentiment. Even as the economy begins to show signs of life, interest rates remain extraordinarily low and equity valuations are still below historic averages.

This atmosphere of cheap money, strengthening confidence, and reasonable valuations has resulted in a flurry of large deals so far in 2013. Below, we take a look at the two mega-deals that have already been announced so far this year with the view that these and other similar transactions have helped spur investor risk appetite.

Dell Inc. (NASDAQ:DELL) Taken Private by Michael Dell and Silver Lake

The first mega-deal of 2013 was the announcement of a $24.4 billion transaction to take PC-maker Dell Inc. (NASDAQ:DELL) private. Market rumors had been floating around in the weeks prior to the February 5th announcement of the Michael Dell-led buyout. Under the terms of the deal, the Round Rock, Texas-based technology company will be acquired by its founder and private equity firm Silver Lake Partners for $13.65 per share.

Financing for the leveraged buyout, which is the largest ever for a technology company, will be provided by a consortium, including Microsoft. The tech giant kicked in a $2 billion loan and additional debt financing was provided by BofA Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets.

The likelihood of the transaction being completed, however, has been called into question in recent days as large Dell Inc. (NASDAQ:DELL) nvestors including Carl Icahn and Southeastern Asset Management have come forward to oppose the buyout. On Thursday, Icahn wrote a letter to Dell’s Board of Directors urging the company to abandon the deal and instead payout a special dividend of $9 per share.

Icahn revealed that he holds a “substantial” position in the stock and CNBC reported that the activist investor has purchased a 6% stake in the PC-maker. The push back from shareholders along with Icahn’s proposal for a special dividend has caused Dell Inc. (NASDAQ:DELL)’s stock price to rise above the $13.65 deal price. On Friday, shares closed at $14.16.

Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.B) and 3G Capital Inc. Acquire H.J. Heinz Company (NYSE:HNZ)

In the biggest deal of the year, and the biggest buyout since the financial crisis, Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.B)) and Brazilian financier Jorge Paulo Lemann’s 3G Capital acquired H.J. Heinz Company (NYSE:HNZ) for $28 billion in cash and the assumption of debt. The equity portion of the deal was valued at $23.2 billion, or $72.50 per share, as the buyers paid a 19 percent premium to Heinz’s previous all-time high stock price. Berkshire Hathaway and 3G will retain 50% equity stakes in Heinz with Berkshire retaining a combination of common stock, warrants, and preferred shares.

Industry watchers have said that the transaction could spur a flurry of consolidation in the food and beverage sector. Stocks such as General Mills and Campbell Soup rose on the news and major consumer staple food companies could benefit from cost synergies by teaming up with competitors. The buyout also underscores Buffett’s desire to put Berkshire’s massive pile of cash to work expeditiously.

In 2012, the famous investor said that he was frustrated after two unnamed deals in excess of $20 billion fell apart. He also said that in 2013, Berkshire may have to do a $30 billion acquisition in order to generate sufficient returns on his firm’s vast pool of capital. The continued aggressiveness shown by Buffett and Berkshire is seen as a positive signal by the markets, and investors are willing to pay a premium for stocks that are potential acquisition targets.

What to Expect

Going forward, the M&A space is likely to continue to heat up and deals should help lift equity valuations. The atmosphere for buyouts and acquisitions is optimal as interest rates remain low, equity valuations remain reasonable and investor confidence is starting to return. If the economy continues to strengthen going forward, the next cycle could be defined by a flurry of mega-deals and smaller acquisitions. This in turn, could provide a significant catalyst for equity prices.

The article Pickup in Deal Activity Another Catalyst for the Market originally appeared on Fool.com and is written by Reuben Ryan Glosier.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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