Tech M&A

http://www.marketwatch.com/story/merger-mania-engulfs-tech-industry-2010-09-30

As the article linked above exemplifies, M&A is read-into far too deeply and misconstrued by many. The linked piece begins as follows:

"Deal wave indicates that natural growth may be limited. To those of us who watch the technology business, it seems like money is burning a hole in the pockets of large high-tech companies."

In this super low interest rate environment, money really is burning a hole in the pockets of any company that is holding a large amount of cash on their balance sheet in terms of relative returns/opportunity cost. If a company has excess cash on hand that can fully fund an accretive acquisition (meaning one that will have a net benefit to the acquiring company's EPS), it would be ridiculous not to do so! (Not to mention completely irresponsible from the fiduciary standpoint of that company's board.)

Assuming a company is already dedicating necessary resources to R&D/CapEx, as is especially the case with tech firms, acquisition activity is in no way indicative of "natural" (organic) growth prospects. Leave it to the over-thinking under-informed financial media to always present a baseless negative spin on a positive story.

IPO backlog

http://www.nytimes.com/2010/09/07/business/07ipo.html?scp=6&sq=&st=nyt

The backlog of IPOs is a negative for the stock market in the near term, as a potential surge in supply of any commodity will serve as a weight on the price of that commodity. Offsetting the increased supply of stock from IPOs, however, is the harder-to-quantify reduction in supply of stocks that occurs when companies repurchase their own stock. We know that companies are very actively buying back shares, but it is difficult to know to what extent. Certainly, with lots of cash, limited investment opportunities and depressed stock prices, stock repurchases make a lot of sense. I believe that even a small rise in demand for equities (there is a huge amount of money parked in fixed income securities, and even gold, that will eventually find its way back into the stock market), we will see a quick and substantial rise in stock prices, and the backlog of IPOs should be absorbed quite easily. As for when that rise in demand will begin, it's anybody's guess; however, I would bet that, in the next three months, we will see investors starting to come back into the stock market. Watch equity mutual fund flows for signs of this return!

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Check back on September 30th when the first articles will be posted by FKI's founders, university finance professors, and additional finance professionals. Student participants of the EMC will have access to post comments, and their own articles, on October 1st. The blog is viewable by anyone, but if you are a finance professional, professor, or anyone with relevant credentials and would like to participate in the discussion send us an email at info@financialknowledgeinitiative.org and we will consider your request. Throughout the duration of the EMC, this interactive blog will be constantly brimming with financial conversation so check back regularly!