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Mergers & Acquisitions, Short Term Gain May Cause Long Term Pain

Ever since the mining giant BHP Billiton (NYSE:BHP) made an offer to buyout Potash Corp (NYSE:POT) for nearly $39 billion the markets have seen takeover news nearly everyday since that announcement. Last week the computer maker Dell Inc (NASDAQ:DELL) made an offer to buy out the data storage company 3Par Inc (NYSE:PAR). Today Hewlett Packard Co (NYSE:HPQ) announced that it would out bid Dell Inc and offer $24.00 a share for 3Par Inc. Dell Inc had originally offered $18.00 a share for the storage company. The major publicly traded companies often follow the leader just as people do. When one company gets a buyout bid other companies will start to look for other businesses to takeover. It kind of reminds me of when people flipped houses for a living. Other M&A news that has been reported. Campbell Soup Co (NYSE:CPB) has reported that they have made a bid for a unit of United Biscuits. SABMiller plc (Pink:SBMRY) made an offer to buy Fosters Group Ltd for $10.9 billion. The continued takeover speculation should continue for a little while as other companies feel that they are missing out on an opportunity. Believe it or not most mergers and acquisitions do not work out all that well.

In 2007 the market rebounded after every sharp decline on M&A news. It was the takeover speculation that helped keep the market trading higher. Remember while takeover activity helps to fuel rallies in individual stocks they also help to increase unemployment when the deal is finalized. When a company merges or takes over another company the first thing that will take place is cost cutting. Therefore, layoffs in the workforce are usually the first thing that will take place. This is where the immediate cost cutting can be felt and will help increase the bottom line. This stock market could benefit in the short term from all these new M&A activity, however, in the long run it could hurt the economy and become a negative for the markets down the road. Hence the old saying, a short term gain may cause long term pain.

Nicholas Santiago
Chief Market Strategist