Feeling Bubbly
A last-minute merger frenzy and cheery CEOs augur well for the economy in 2005
Multibillion-dollar deals in telecom, healthcare, and software. Bullish forecasts from blue chips like GE and FedEx. Measured monetary policy moves from the Federal Reserve Board. The biggest dip in weekly jobless claims in five months. A Dow near its 52-week high. A strong, if not spectacular, Christmas shopping season. Even a dip in oil prices.
As 2004 winds down, there's reason to be jolly about the U.S. economy. Sure, the dour Grinch will still have reason to sneer: The pace of job growth remains below that of a few years back, the dollar is slumping despite a pep talk from the president, and consumers are going into hock to buy their presents.
But, as Jack Stack, CEO of engine supplier SRC Holding Corp., told Vice President Cheney at a recent two-day economic gabfest in Washington, "the bottom line, in summary, is that we have elevated from cautiously optimistic to optimistic." The proof may be in the recent flurry of put-your-money-where-your-mouth-is deals demonstrating that Wall Street and corporate America are back in growth mode.
Merger madness
In an end-of-the-year frenzy, mergers totaling about $90 billion were announced in one week of December. Oracle and PeopleSoft ended an 18-month hostile takeover battle and agreed to combine in a deal worth $10.3 billion. Sprint and Nextel plan to join forces to become the third-largest wireless provider in a $35 billion merger. Software maker Symantec agreed to acquire Veritas Software in an all-stock deal worth $13.5 billion. And Johnson & Johnson is buying Guidant for $25.4 billion to become the largest provider of heart devices. There were also some smaller deals, including industrial conglomerate United Technologies Corp.'s buying Britain's Kidde for $2.8 billion.
These deals cap off a year of double-digit growth for merger and acquisition activity. Some $768 billion worth of deals have been announced in 2004, up from $544 billion in 2003, according to Thomson Financial. Investment banks are clearly reaping the benefits. Lehman Brothers announced better-than-expected quarterly earnings due in part to a 95 percent rise in M&A revenues over the same period a year ago. Goldman Sachs also beat earnings estimates.
"A lot of corporations are flush with cash, so it's not surprising they are going on a buying spree," says Nariman Behravesh, chief economist at Global Insight. Behravesh doubts rising interest rates will be enough to choke off the M&A pipeline and anticipates an even more eventful 2005 on Wall Street.
One reason for optimism is increasing exports, the offspring of a weak dollar that is making U.S. goods cheaper in foreign markets. On that note, China sent an early Christmas present by announcing it would impose export tariffs on its own textile manufacturers beginning January 1, when long-standing quotas governing the global textile trade are due to expire. The move comes as Washington is weighing whether to impose restrictions on Chinese-made clothing.
Any break for American firms, though, would probably amount to temporary patchwork at best. China already controls about a quarter of the world textile market, and that is likely to grow to 60 percent within several years--regardless of any new tariffs--according to Credit Suisse First Boston. But on the selling side, China has become relatively accessible to U.S. and other western businesses trying to tap into the country's burgeoning wealth. Another recent policy change will allow retailers like Wal-Mart to open branches anywhere in China, with few restrictions--a significant easing of prior rules. Another recent government move will open up all of China to U.S. insurance companies, such as AIG.
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