Merging Companies Create Their Own Action

 | Oct 24, 2011 | 11:40 AM EDT
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Some good things are happening. There are some smart takeovers: Cigna (CI) buying HealthSpring (HS), validating the Humana (HUM) model for Medicare Advantage; Oracle (ORCL) trying to get the jump on (CRM) by buying competitor RightNow Technologies (RNOW); J.M. Smucker (SJM) picking up Sara Lee's (SLE) North American coffee business to augment its Folger's and Dunkin brands sales; Mattel (MAT) buying Hit Entertainment for the rights to Thomas the Tank Engine.

All of these deals will augment growth in a slow-growth or no-growth world. All of them fit in with lots of room to slide overhead. All of them are the kinds of deals that make it so you recognize that stocks are cheap compared with their growth rates. All of them call into question the basic underpinnings of how we value stocks, namely that we price them off of S&P futures, which are totally hostage to Europe's woes.

The globalization of our stock market cannot and does not jibe with the actual inner workings of our companies. Merging companies are taking advantage of the decade-long bear market to pick up companies and divisions more cheaply than they should. They are using their cash to do more than just buy back stock. Maybe one day they will realize that the buybacks aren't convincing anymore and just serve to keep the number of shares outstanding flat after all the shares that are issued to already overpaid managements.

But the key takeaway here with these deals is that companies are tired of waiting for their stocks to go higher because they are doing well. Instead, they are buying more growth, because they can make fortunes doing so. What they do with these fortunes we don't know, as it is obvious that as long as stocks are part of indices, it may not even matter.

However, they are not standing still. They are doing the right thing, even if it doesn't matter today. Eventually we will be out of this bear market, and those companies that use the bear market valuations to pick off companies and divisions will be accorded better valuations.

Makes sense to me.

Should make sense to you.

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