NEW YORK - Investors are always chasing opportunities, but the recent stock market rally has them going to extremes. With corporations and private equity firms on a buying spree this year, investors seem reluctant to sell shares of companies they think might be purchased next.
That has put a floor under share prices and helped ignite a record-setting surge for stocks this year.
It’s hard to miss all the merger and acquisition news. Almost every week there is a fresh batch of super-sized deals that are bigger than the last. Big companies are buying smaller companies, buyout firms are taking public companies private and companies are uniting to expand the reach of their businesses.
Driving the activity is the surplus of cash held by private equity firms and public companies. At the same time, interest rates remain close to historic lows and banks are eager to provide generous financing.
The total value of announced acquisitions worldwide has reached a record $3.52 trillion for the year, exceeding the previous record $3.33 trillion for announced deals set in 2000, according to Dealogic.
Just last week, one of the biggest leveraged buyout deals ever came when The Blackstone Group, a private-equity firm, agreed to buy Equity Office Properties Trust, the nation’s largest publicly traded office-building owner and manager, for $19 billion.
Other notable recent deals include US Airways Group Inc.’s $8.8 billion hostile bid to take over Delta Air Lines Inc., Freeport-McMoRan Copper & Gold Inc.’s acquisition of Phelps Dodge Corp. for $25.9 billion that would create the largest publicly traded copper company, and financial firm Charles Schwab Corp.’s sale of its wealth-management subsidiary U.S. Trust to Bank of America Corp. for $3.3 billion.
As the dealmaking has ramped up, the stock market has risen to levels not anticipated by most market-watchers earlier this year. Dow Jones has soared above 12,000 to record highs in recent months, while the Standard & Poor’s 500 index has vaulted to levels not seen in six years.
The surge is due in part to investors counting on more dealmaking to come — and hoping that their company might be the next target. The average premium paid over market prices for shares of companies being bought this year is 17 percent, Thomson Financial says.
“If you are not invested, you can’t get part of the action,” said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors in Albany, N.Y. “When you see all this merger activity going on, it increases your confidence in stocks.”
Even hedge funds are playing the market differently, which is helping boost stocks overall.
One of their often-used trading strategies is to “short” stocks, meaning they borrow securities and sell them with hope that prices will then fall so they can profitably buy back shares at the lower prices.
But that strategy doesn’t work when stocks are rising.
As a result, many investors have scaled back their short positions, which is evident by the steep decline in short S&P 500 contracts from around 78,000 in July to about 34,300 now, according to Merrill Lynch.