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Why 2014 could be the year of the megamerger
With three mergers totaling more than $110 billion in just the past week, 2014 could be the year of the megamerger, as cash-rich companies hunt for growth in a sluggish economy.
The latest deal was Facebook's (FB) surprise bid for WhatsApp for $16.4 billion, or $19 billion when including restricted stock. The deal is the fifth-biggest tech deal ever, and pushes tech mergers to a total of $42 billion year-to-date, the heftiest volume since the tech merger mania in the dotcom bubble era of 2000, according to Thomson Reuters.
"All these companies are flush with cash and need to do something with it," said Andrew Burkly, head of institutional portfolio strategy at Oppenheimer Asset Management. "I would definitely say companies and CEOs probably feel a little more comfortable that their stock has a high value at this point."
So far this year, there have been about 37 deals of a billion dollars or more compared with 29 a year ago at this time. "This is really a continuation of what we've seen in terms of deal volume," said Richard Peterson, director of valuations and risk strategies, Global Markets Intelligence at S&P/Capital IQ.
"There's a handful more, but you've got some of the biggest deals ever," he said.
The Facebook deal follows closely on Comcast's (CMCSA) $69.3 billion deal for Time Warner Cable, (TWC) announced last week and this week's $25.5 billion bid from Actavis for Forest Laboratories (FRX). Comcast is the parent of CNBC.
"Last year, there was over $1 trillion of U.S. M and A. That was the biggest year since 2007 ... and already as we speak, a little bit past the midway point of the first quarter, there's been over a quarter trillion (dollars) in deals," said Peterson.
As long as there are expectations for an improving economy and the stock market hangs in, the activity should continue.
Armed with strong stock prices, CEOs are betting they can gain share, or expand into new areas with marriage partners, and the deals could stir more activity as rivals see a changed landscape. In the case of Facebook, it's seeking a leg up in mobile with its purchase of the WhatsApp instant messaging platform.
Big mergers don't necessarily give new life to the stock market. "It would definitely suggest later cycle activity," said Burkly.
"Most investors this year would have liked to see the return of capex, which was the big waited for, hoped for nirvana, which is still missing in terms of this bull market ... I think that's what people would rather see. We've gone from them using cash for dividends, buybacks and M and A."
Burkly said it is a sign of confidence, however. "We're getting back to normal a bit, but it's also a sign of not organic growth, but you're buying growth," he said. Tech would be one area where he expects to see more activity, since technology companies have had good earnings and are holding piles of cash.
(Read more: Why Facebook valued WhatsApp at $16 billion )
Just as higher stock prices are encouraging corporate managements to step up and do deals, the lofty prices are also a deterrent to those looking for bargains. The deals are also so sizeable that the buyers are strategic corporate buyers, not private equity firms, and the so-called club deals with a band of private equity buyers are out of vogue.
"Bankers would love to declare we're off to the races. It's still spotty. There are still some big deals getting done," said George Sard, CEO of communications advisory firm Sard Verbinnen. "My read is CEO confidence is improving, but it's still fragile. The environment is looking better, but I wouldn't call it boom season in M and A."
-By CNBC's Patti Domm. Follow her on Twitter @pattidomm.
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