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Ask me how to describe this whole beautiful thing
Well, if I were a bell
I'd go ding dong, ding dong ding!
-- Frank Loesser, Guys and Dolls
Four months ago I wrote that the market was sending us bullish signals. In effect, the market was ringing a bell signaling an underlying bullish strength for those willing to hear it.
Well, guess what? The bell isn't just ringing anymore -- it's pealing far and wide.
That June column mentioned two indicators of a bull market that has legs: a pick up in merger and acquisition activity; and a re-emergence of initial public offerings or IPOs. We’re seeing both this fall.
Over the past week alone, three mega mergers were announced: Bank of America acquiring FleetBoston Financial in a $47 billion deal; R.J. Reynolds Tobacco Holdings agreeing to merge with Brown & Williamson, the U.S. unit of British American Tobacco in a one-for-one stock transaction; and Anthem Inc. buying WellPoint Health Networks for $16.4 billion is stock and cash.
The Bank of America/Fleet deal, if approved by regulators, will create the nation’s second largest bank behind Citibank, assemble a huge network of consumer banking locations across the nation, and increases Bank of America’s national presence into the northeast where they lacked any significant operations. And it could go a long way in appeasing disgruntled Fleet customers who felt reduced to mere statistics after a series of Fleet acquisitions that had the company’s back office unable to keep up with simple tasks such as changing customer’s addresses.
Bank of America has been reporting stellar earnings, and the stock was trading at or near its all time high before the announcement. As is the case, the stock of the acquirer falls and the acquirees’ share price jumps. But it in effect lowers the number of banking shares outstanding, and supply/demand forces should lift prices in the entire industry, if not the sector.
It’s the same story for the beleaguered tobacco giants. In an effort to jumpstart growth in market share and the bottom line, the merger of RJR and Brown & Williamson is expected to cut costs and increase profits for investors. And more important for shareholders, RJR will continue to pay its annualized $3.80 dividend, which translates to an annual yield of just under 8 percent. Wall Street analysts are enjoying a nicotine high from this deal, with the share price of the new company (to be called Reynolds American) predicted to be $55 as it will be seen as financially stronger, more efficient and more competitive.
The $16.4 billion marriage of Blue Cross giants Anthem and WellPoint will create the nation’s largest health insurer, with 26 million health plan members in 13 states. Together these companies account for more than 30 percent of the 84 million Blue Cross/Blue Shield members nationwide, and will be called WellPoint Inc.
And those IPO signals? This year will probably go down as the worst year in history for initial public offerings, but the tide is turning. Recent activity has been great. Kathleen Smith of Renaissance Capital says we’re at a new turn for IPOs. Unlike the IPO market of the late ‘90s, companies that are now coming public are more conservative, more cautious. They are usually larger companies, meaning more shares are available.
IPOs are up 33 percent year-to-date, with financials and insurance-related companies leading the pack, and more to come in the pipeline. Smith says now’s the time to pay attention as the best companies go public early in the cycle. The rules of the game have also changed. You no longer have to know someone to get in on the ground floor.
For a review of the best IPOs so far this year, and a preview of IPOs coming to soon, tune in to this week’s broadcast to hear Karen talk to Ben Holmes of the Protégé Funds and Bill Hambrecht of W.R. Hambrecht & Co.
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