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Are mergers making a comeback?

An uptick in mergers and acquisitions is good news for the Wall Street firms that will earn hefty commissions. But it may also be a confirmation that recent signs of economic rebound are for real.
/ Source: CNBC

After a severe drought, it seems like it’s raining deals. In the past two days, billions of dollars worth of bids have been launched across a wide portion of the economy — good news for the Wall Street firms that will earn hefty commissions. But it may also be a confirmation that recent signs of economic rebound are for real.

IN JUST THE last two days, billions of dollars worth of bids have been launched across a wide portion of the economy — from apparel to metals, technology to auto parts and transportation. This list includes:

EMC, a maker of computer data storage devices, which has bid $1.3 billion for industry laggard Legato Systems.

Auto parts maker ArvinMeritor launched a hostile $2.2 billion bid for rival Dana Corp.

Trucking industry giant Yellow Corp. has offered to pay nearly $1 billion for rival Roadway to create one of the world’s biggest shipping companies.

Canadian aluminum maker Alcan launched a hostile bid for French rival Pechiney for $3.85 billion in cash and stock.

Blue jeans maker VF Corp. thinks it found a good fit with upscale apparel maker Nautica Enterprises in a deal valued at $585 million.

What’s driving these mergers? Companies that have cut costs to the bone are now looking for new ways to expand profits. With little room to boost revenues in a sluggish economy, buying your competitor provides instant revenue growth — and the prospect of even bigger efficiencies through more cost cutting. That’s a big reason for Alcan’s hostile bid for Pechiney, said Victor Lazarovici, a mining and metals analyst at BMO Nesbitt Burns.

“There’s a lot of merit in the integration of the two companies; the assets are highly complementary,” he said. “At this point in the recovery cycle, there’s always excess capacity. A reasonably strong economic recovery in the U.S. could absorb those excesses fairly quickly.”

Combining data storage maker EMC Corp. with industry laggard Legato Systems offers the prospect of “synergies on the revenue line to accelerate growth and on the bottom line to take out cost,” according to company CEO Joseph Tucci.

“We can help open doors for the Legato sales force,” he said, “and we do some duplicate work and we can take out some cost there.”

Along with heavy cost cutting, companies have also been building up cash to help weather a rough economy. Now, as interest rates approaching zero, the return on that money has been vanishing. So companies are looking for ways to send that cash back to work.

InsertArt(1950918)It’s too early to determine whether this burst of activity represents a rebound in mergers and acquisitions. Even after this week’s announcements, the pace of deal making is tracking below last year’s levels, according to Thomson Financial Securities Data. And it remains well below the merger mania of the late 1990s.

But some analysts and money managers say conditions are ripe for a merger rebound. For one thing, with stocks down from peak levels three years ago, buyers can take advantage of bargain prices. And, if you haven’t got enough cash, borrowing the money you need to do a deal is cheaper than it’s been in 40 years.

“Interest rates are so low that these transactions can be financed at a very low cost of capital,” said money manager Tim Ghriskey. “So it makes a deal that a company may have been looking at for while much more affordable. ”

The uptick in merger bids is also a signal that CEOs — after years of bemoaning a “lack of visibility” about the economy — are willing to place bets that a long-awaited economic rebound really is on the horizon. Some of them, like Yellow Corp., report that they’re hearing about that economic pickup in conversations with their customers

“On the manufacturing side of the business, the weak dollar has had an impact on the manufacturing base in the country,” said Yellow CEO William Zollars. “So hopefully he this is the beginning of that recovery.”

With some CEOs confident enough to launch hostile bids, that could be a sign that more deals are on the way, according to Paul Gibbs, an analyst with J.P. Morgan Chase & Co. in London.

“The most aggressive (CEOs) start first with hostile activity because they see lots of cheap assets out there,” he said. “After that the rest of the M&A market kicks in,” he added.

But while a pickup in merger activity could be a sign that companies are feeling more confident, it doesn’t mean the stock market will continue to get a boost.

“Acquiring management doesn’t know anything more about the future of the stock market than anybody else does,” said Ghriskey.

In the meantime, Wall Street firms are eager to stoke the deal making machine, after a big drop in fee revenues took a bite out of industry profits and forced major layoffs.

Corporate managers also have a strong reason to want to make a deal, says Ghriskey. With stock prices depressed, so are stock options. A merger gives management an opportunity to reprise those options — putting them back in the money.

Reuters contributed to this story.