The stock market may be more terrifying than campfire ghost stories were when you were ten. Doubts about economic growth litter the ground like beer cups after a NASCAR race. But the merger and acquisition market is hot. Companies spent 20% more money buying other companies in the first quarter of 2011 than in the first quarter of 2011. And the dollar volume of deals is up 40% from the first quarter of 2009, the low for this cycle.

The activity in some sectors is positively frantic. For example, in the chemical industry 2011 is shaping up as a record year for M&A. The first half of the year saw $60 billion in announced deals, an increase of 41% from the first half of 2010.

Now it may seem odd that companies are so willing to invest billions and millions when you and I are having such nightmares about putting our thousands and hundreds to work, and that companies are so willing to buy other businesses when the global economy may be slowing, but it’s actually completely logical.

And that logic suggests a strategy that you and I can use to invest in the currently very volatile stock market.

So what is this logic?

Think about what’s scarce right now. And what’s cheap. Read more

Do the new Coke and the new PepsiCo both fail the taste test?

Gee, I really hate this deal.

It’s not just that I question the price that Coca-Cola (KO) is paying to acquire the North American operations of its biggest bottler Coca-Cola Enterprises (CCE). The $12.7 billion price works out to about the same multiple that PepsiCo (PEP) paid to acquire its two biggest bottlers. After the deals both close Coke will have control of about 90% of its North American bottling and distribution system; Pepsi will control about 80%. But while the companies are paying about the same price PepsiCo looks like it has a much bigger opportunity to cut costs in its deal than Coke does.

Or that the deal takes away a major reason to own shares of Coca-Cola. Wall Street preferred Coke to Pepsi because it saw Coke as the better emerging markets play. But this deal will take Coke’s revenue from 74% overseas to 54% overseas, according to Barclays Capital.

Or even what the deal says about the declining market for soft-drinks in North America. And the shift in power toward big box stores such as Wal-Mart (WMT.) First, U.S. sales volume of carbonated drinks is down across the industry according to Beverage Digest. Sales volume fell in 2009 following a 3% decline in 2008, a 2.3% drop in 2007, and a 0.6% falling 2006. At the same time, the increasing market power of big box retailers has put pressure on soft drink margins and cut into the shelf-space that Coke and Pepsi get for their bottled waters and the other non-carbonated drinks that they’re counting on to make up for the drop in carbonated soft-drink sales volumes.

No, what really troubles me is that this deal has history, you see. And the history is one of asset-shuffling and accounting razzle-dazzle. If these companies’s are willing to forgo the financial magic that the deals brought them in 1986 and 1999, respectively, then the long-term challenges facing these companies are more serious than I thought. (For more about the implications of the current wave of deals see my post http://jubakpicks.com/2010/02/26/can-ceos-destroy-shareholder-value-in-an-acquisition-just-watch-them/ ) Read more

Can CEOs destroy shareholder value in an acquisition? Just watch them

I call it destruction by acquisition.

Forget the synergies, the cost-savings, the cross-selling that CEOs tout when they announce one of these deals.

Too many of the huge merger and acquisition (M&A) deals struck in the second half of 2009 and that are still being struck will take money out of shareholder pockets this year and for years to come.

But some CEOs are so desperate for growth and so pessimistic that their company can produce growth internally–you know by doing things like developing new drugs, marketing new products in new markets or finding new reserves of oil or natural gas, for example—that they’re willing to mortgage the future for a deal that makes them look good now. Or that allows them to disguise how bad things actually are with accounting tricks for long enough to walk out door and cash out those options. (For more on how hard it will be to find profits in this recovery see my post http://jubakpicks.com/2010/01/19/get-your-portfolio-ready-for-the-profitless-global-economic-recovery/ )

Money can’t buy you love but it can buy a CEO the semblance of revenue and earnings growth.

Not every deal in 2009 and 2010 will destroy shareholder value. I’d give you a few at the end of this post that might actually work out well for shareholders and discuss how to tell the difference between the good and the bad. But a high percentage of the deals that have earned the headlines and moved the stock market in the last year or so need to be seen for what they are: admissions of weakness in sectors desperate for growth. Read more