Some signs of rationality

Good day everyone!

While most of our fellow citizenry seems to be having a religious experience in relation to the economy, there are some signs of rationality returning to the financial markets. The proof is in the merger and the acquisition. As we have talked about before here on ze blog, all of finance boils down to: buy low, sell high. And as is abundantly clear, assets of all kinds are priced low right now. So a body, or a corporation even, that had some cash sitting around should be looking around for buying opportunities. Enter one of the more important investment stories of the last several months…

Merck, one of the largest pharmaceutical companies in the world, yesterday announced that it was going to buy its rival Schering-Plough for $41.1 billion. The deal is being financed by a combination of stock, debt and cash (for God’s sake). Whatever the outcome of the purchase years down the road, the fact is that Merck saw an opportunity to buy a rival, and cheaply. This is rational behavior. It is also indicative of the fact that some businesses are beginning to see opportunity (a positive view of the future) in the economy, as opposed to threats (a negative view of the future).

I have said for a while now that all of these “sale” orders taking place in the financial markets are resulting in cash being hoarded somewhere. That cash is sitting on the sidelines waiting. Waiting for what? For some, they are waiting for a sense of stability and that the smoke has cleared. For others, they are awaiting evidence that the economy and financial markets are rising again. And for still others, they are awaiting the right opportunity. This is why the Merck purchase is a big deal. [cue: cheesy cable-TV ad voice] “But wait, there’s more!”

There are other prospective mergers and acquisitions (M&A) being discussed. Swiss pharma company, Roche Holding AG is discussing purchasing the remaining shares of the U.S. biotech firm Genentech that it doesn’t yet own. And you may remember, also in the pharma industry, that a month and a half ago or so, Pfizer announced that it was acquiring its rival Wyeth for $68 billion. Furthermore, Dow Chemical has finally agree to go through with its purchase of Rohm & Haas for $15.3 billion.

In short, cash is flowing! This is an important trend to follow over the next month or two. If businesses continue to participate in M&A transactions it is a sign of rationality returning to the business world. It is also a sign that businesses are confident in their financial structures and willing to take a risk in making big business purchases. So if you are interested in investing and are looking for some signs that you can place your confidence in, then pay attention to M&A announcements.

Be well!

Jason