M & A Activity to Heat Up Between 'Haves' and 'Have-Nots'

We spotlighted Pulte Homes (NYSE: PHM) along with a few other homebuilders recently as signs that the housing market is starting to move again. Wednesday morning we were greeted with the news that Pulte is buying out Centex (NYSE: CTX) for $10.50 a share – a 38% premium to its close Tuesday.

Moving again indeed.

We’ve seen a number of mergers and proposed mergers in the past quarter: Pfizer’s (NYSE: PFE) takeover of Wyeth (NYSE: WYE), Merck & Co’s (NYSE: MRK) merger with Schering-Plough (NYSE: SGP) and NRG Energy’s (NYSE: NRG) proposed takeover of Calpine Corp (NYSE: CPN).

IBM (NYSE: IBM) pulled out of a planned merger on Monday after Sun Microsystem’s (Nasdaq: JAVA) board rejected its formal offer. It was a better deal for IBM, with Sun’s cash reserves and cheap asset prices.

But this doesn’t mean that we won’t be seeing large merger activity over the next few quarters. In fact, we’ll probably see a resurgence of it as the credit markets start to open up and the economics become clear in many industries.

The recession has created an interesting situation where there is a significant difference between the haves (those companies who have weathered the storm and are sitting on large cash reserves) and the have-nots, those that haven’t – and look appetizing for takeovers.

Companies with stable cash reserves are going to look at their weaker competition and see cheap ways to buy market share. And like the buyouts above, this activity can be an instant windfall for investors who get in early.