Back in April, we noted the bullish trend of share buybacks, acquisitions, and private equity reducing the supply of stock trading in the market. This hits close to home here at The Float because the float itself is getting smaller...and, all else equal, this reduction in supply will tend to push stock prices higher.
At Reuters (itself the object of a likely-to-close $17.5 billion acquisition by Thomson Financial), Kristina Cooke notes that recently announced deals would reduce the S&P 500's market cap by roughly 2 percent--and unleash a "wave of cash to be reinvested as the total supply of equities shrinks."
Then this morning: News that Microsoft will acquire Seattle's aQuantive for roughly $6 billion (an 85 percent premium over yesterday's closing price in AQNT), which comes on the heels of Google's recent purchase of DoubleClick for $3.1 billion and other M&A activity in the online advertising space.
Short term, these supply-demand trends are clearly bullish, but as Tim Woolston of Boston Advisors LLC says in the Reuters piece, "Wall Street, like nature, abhors a vacuum. If there is a perception that too much stock is being removed from the market, I think the IPO market will ramp up."
When will the torrid pace of M&A, buybacks, and private equity buyouts begin to slow? What will trigger the slowdown? With credit readily and cheaply available and corporate balance sheets flush with cash, we don't pretend to know. But at some point, somewhere, something's going to go haywire.
All (or at least most) of this activity may be rational in the micro sense that each deal is sensible enough in and of itself (repurchased shares seem cheap, private equity funds are loaded, interest rates remain low, liquidity is abundant, and most buyout targets are profitable, unlike the cash-hemorrhaging disasters snapped up by big technology firms in the late-1990s). Taking a broader macro view, however, the whole phenomenon feels a little frenzied. And frenzies are typically great fun for everyone...until they aren't.
One indicator of the torrid pace: The incredible number of posts at the WSJ's "Deal Journal" blog, where Dana Cimilluca wonders out loud this morning if Microsoft's aQuantive acquisition might be remembered as marking the top of the M&A frenzy.
UPDATE: We've added more on this topic Monday morning.
Kristina Cooke, "Mergers could take 2.0 pct bite out of S&P 500," Reuters, May 17, 2007
"Microsoft pays 85 pct premium to buy aQuantive," Reuters, May 18, 2007