HP's counter-offer for 3PAR and HSBC's push for Nedbank sparked a revival in risk appetite this afternoon, which saw Wall Street rise strongly on the open.
Merger activity continued heating up today, after HP made a counter-offer for data-storage provider 3PAR. The $1.6 billion bid, worth $24 a share, is a 33% premium above Dell's bid of $18 a share made last week.
Shares in 3PAR pushed higher than HP's offer to $25.35, suggesting investors may be expecting a bidding war to break out – which could push the share price even higher.
Banking stocks were buoyed on the FTSE this morning after HSBC announced that it intends to buy a 70% stake in South Africa's Nedbank.
The deal is said to be worth around $6.8 billion, and would give HSBC broader entry into the fast-growing African market. Old Mutual, which owns the majority stake in Nedbank, rose 3.8%.
Meanwhile, according to the Sunday Times of London, SABMiller is in talks with Foster's Group to purchase its beer operations for $10.9 billion. The speculation saw shares in Foster's rise 7.56% on the Australian Stock Exchange earlier today.
The recent spate of M&A deals comes at an interesting time in the business cycle. Generally speaking, M&A activity tends to pick up during times of economic expansion as companies have easier access to capital and are more confident on the business outlook.
Arguably, the current macroeconomic indicators are pointing to a slowdown in economic activity and confidence remains fragile, which is why the flurry of merger activity is something of a surprise at this time.
However, what may be triggering all the activity is the ultra-low interest rate environment which has allowed companies access to cheap debt in order to finance these deals in cash. During times of economic expansion interest rates tend to be higher, making it cheaper for companies to finance acquisitions by raising equity rather than borrowing.
However, with interest rates at historic lows, and large multinationals able to secure debt at attractive rates, it appears the current environment has become conducive to merger activity.
The jump in merger activity may also suggest that companies are in fact confident on the future outlook for their businesses, and that current company valuations are compelling enough to strike a deal.
This may be just the beginning of a healthy M&A season, with more deals likely to be announced over the next year. Only this morning, 3M CEO George Buckley said that his company may spend up to $2 billion on acquisitions by the end of the year.
As mature companies seek ever more ways to expand and grow, acquisitions may provide the best method to secure growth in a still-challenging economic environment.
The pickup in merger activity improved risk sentiment and helped equity markets shake off the recent release of weak economic data.
By 3:30pm (London time) the Dow Jones Industrial Average had gained 30.61 points (+0.30%) to 10244.23 and the S&P 500 had risen 3.14 points (+0.29%) to 1074.83, while the Nasdaq 100 was down 2.56 points (-0.14%) to 1823.19.
In foreign exchange, the Australian Dollar rebounded strongly against the US Dollar after this morning's slip.
Concerns over the impact of a hung parliament for the Australian economy initially hit AUD/USD, but investors have since shrugged off those concerns and the Australian currency is looking to test the $0.9000 mark once again. AUD/USD was last trading at $0.8970 after reaching an intraday low of $08865.
The Japanese Yen strengthened against the US Dollar to ¥85.15, after a phone conversation between Prime Minister Naoto Kan and Bank of Japan Governor Masaki Shirakawa signalled to investors that Japanese officials won't immediately intervene in the currency market to stop the Yen's rise.
The fact that the officials did not meet in person was interpreted as a lack of conviction from both parties on the matter of intervention.
The Euro was slightly weaker against the US Dollar at $1.2685, after the manufacturing PMI fell across the Eurozone in August. GBP/USD was little changed from its previous close, trading at $1.5530.
Investors will be nervous ahead of the US existing homes sales data to be released at 3:00pm tomorrow (London time).
At the same time, the Richmond Fed Manufacturing Index will also be closely eyed to see whether it shows a similar decline in manufacturing activity as the Philadelphia Fed Manufacturing survey did last week.
With lower volumes of trading adding to the volatility in equity markets, a surprise on the downside could spark a sell-off.
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'Spread Betting News 23 Aug 2010', Article by IG Index, last update: 23-Aug-10
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