More M&A A Positive

On Wednesday evening, Hewlett-Packard (HPQ) announced it was buying 3Com (COMS) for $2.7 billion in cash, a 35% premium over its closing price.  This will enable HP to sell just about everything for data centers, from servers, storage, management services and networking.  This deal is expected to close in the first half of 2010.  This deal is raising eyebrows for a number of reason.  First, it was all cash and a big premium over the closing price.  Second, this wasn’t the company many believed would be bought out.  Third, the options trading before this deal was announced has many believing somebody knew something that you & I weren’t privy to.  Something stinks.  I’m sure there will be an investigation.

The ball is now in IBM’s court whether they want to make an acquisition and there are rumors that Brocade is the company they may target.  But, investors need to focus on the bigger picture.  The M&A activity is heating up and it has been for some months.  The credit markets have been easing allowing more deals to get done and company’s are anticipating a slower growth environment.  Therefore, the bigger companies with lots of cash are using that cash to acquire growth.  I think this will continue into 2010.

Where you & I can benefit is by focusing on where the action might be for the next acquisition.  Sure, we could speculate on individual companies.  But, that’s exactly what that would be, speculation.  We know there are going to be more deals.  The easier way to benefit from the acquisitions is to buy a basket of companies that are prime.  The place I think that has the most potential is the midcap growth area.  These companies are big enough to matter to a big company, but small enough that the big companies can afford them.

Not only can we benefit from M&A activity by purchasing medium-sized growth companies, but these buyouts help the overall market.  It builds confidence that if big companies with lots of cash are finding values and pay big premiums for companies, then surely there are a lot of companies undervalued.  Hence, a higher market.  One more positive for the market.  Add it to the list.

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