Stocks reacted positively, taking the deals as a sign that companies sitting on massive cash hordes were finally feeling bullish enough to spend. Some strategists viewed the deals with less enthusiasm, noting that several involved companies with slowing profit growth looking to pump up their balance sheets through acquisition.
Nonetheless, coupled with relief over a swift outcome to the presidential election, the deals helped lift stocks to healthy gains in the final months of the year. And several analysts said they expect the trend to continue into 2005, providing a boost to stocks viewed as possible acquisition targets. Shares in targeted companies tend to rise because investors believe the acquirer will pay a premium for the shares.
(Paul Sakuma -- The AP)
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_____2005: Where To Invest_____
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Risks Cloud a Sunny Forecast (The Washington Post, Jan 2, 2005)
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Investing Is a Rebalancing Act (The Washington Post, Jan 2, 2005)
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Fees Take a Bite From 401(k)s (The Washington Post, Jan 2, 2005)
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Regular Tinkering Keeps Allocations in Check (The Washington Post, Jan 2, 2005)
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Options Exist to Hedge Against Rising Interest Rates (The Washington Post, Jan 2, 2005)
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_____Cash Flow_____
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No-Leak 401(k)s: Albert B. Crenshaw writes, "One of the key problems that continute to beset 401(k) and related retirement savings plans is what experts call "leakage" -- the tendency of account holders to withdraw their money when they change jobs and spend it."
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Michael Obuchowski of Altanes Investments in New York said big drug companies could be shopping around for smaller, high-growth firms to punch up their bottom lines. He mentioned two biotechnology firms, Amgen Inc. and Gilead Sciences, that could be attractive targets. Altanes owns shares in both firms.
"Right now we are in an environment where companies are looking for growth," Obuchowski said. "Smaller companies in well-defined markets with excellent growth potential are becoming more attractive."
Other analysts mentioned small and mid-size banks as potential takeover targets for larger players such as Wachovia and SunTrust looking to fill holes in their branch networks. Citigroup Inc. executives have also said they will continue to make targeted acquisitions of regional banks, especially those in states such as Florida, Texas and California with booming -- and increasingly wealthy -- Latino populations. (Media companies such as Univision Communications Inc. and consumer firms such as Avon Products are also viewed as big beneficiaries of the surge in Hispanic wealth.)
In addition to making deals, companies are likely to use excess cash in 2005 to continue buying back their own stock, a phenomenon that tends to boost the market overall. In 2004, through October, according to debt-rating agency Standard & Poor's, companies had repurchased $178 billion in stock, 52 percent more than in 2003. General Electric Co., Kraft Foods Inc. and Deere & Co. have all announced major stock buyback initiatives.
Joseph Lisanti, editor of Standard & Poor's market forecast newsletter, estimated that as of early December, companies in the S&P 500-stock index were sitting on $600 billion in cash. "It's very difficult to keep that much on the balance sheet without doing something," he said.
In addition to buybacks, companies may look to boost dividend payments to investors, especially since President Bush is expected to try to make his dividend tax cuts permanent during his second term. Companies with growing dividends have outperformed the market in 12 of the past 14 years. The only exceptions were the bubble years of 1998 and 1999, when dividends (not to mention profits) were considered totally last-century.
Big-Cap Opportunities
Big, dividend-paying companies tend to outperform the rest of the market even more when the profit cycle decelerates, as it is expected to do in 2005.
Jonathan Golub, U.S. equity strategist for J.P. Morgan Funds, said smaller firms are currently trading at very high prices when compared with earnings. The Russell 2000 index, which includes smaller firms, surged in 2004. When earnings slow, companies in the index will seem even pricier than they do now, Golub said. Bigger firms in the S&P 500, meanwhile, are trading at valuations close to the historic average.
