NEW YORK (CNN/Money) -
Even before Wednesday's $11 billion deal to combine Kmart and Sears Roebuck & Co., 2004 was slated to be the best year for deals on Wall Street in three years. And experts expect the rebound to continue into 2005 at least.
"This has been building; it's been happening quietly for several months," said James Awad, chairman of Awad Asset Management.
"With the election clearing the deck, I think you'll see more momentum. If you're going to have a 10 percent increase in corporate profits next year, I don't see why you couldn't be up 20 percent (in mergers and acquisitions)."
Even before the Kmart-Sears merger, deals this year had topped $621 billion in value. That already was above 2003's total of $538 billion, according to Thomson Financial.
Wednesday's deal would be the fourth largest announced in 2004 in terms of purchase price. It would be the largest since Wachovia Corp. agreed in June to buy SouthTrust Corp. in a $14.3 billion stock deal. In August, shopping mall operator General Growth Properties agreed to buy competitor Rouse Co. for $7.2 billion in cash. Factoring in assumed debt, the value of that deal was $12.6 billion.
Richard Peterson, market strategist for Thomson, said M&A activity could well be up 25 to almost 30 percent this year, the best percentage gain since the 44 percent gain posted in 1997.
"The catalyst for deals is generally rising corporate profits," said Peterson. "We should have rising activity next year."
Rising stock prices can also spur deals, and the recent run-up in U.S. equities could lead to more. That appeared to be the case on Wednesday, as Kmart (Research) was essentially using shares that had gained 322 percent year-to-date in exchange for depressed shares of Sears (Research).
Peterson said this week's deals show that the market seems to be making an end-of-the-year push.
"Companies are willing to pay a little bit of a premium. The merger market is not taking a holiday," he said.
Weak dollar a plus and minus
Experts say the decline of the dollar, particularly in recent weeks, could limit overseas purchases by U.S. companies. But the dollar's weak value could spur the acquisition of U.S. companies, especially by Europeans, in the coming year.
"With Monday's purchase of Kraft Food's candy business by Wrigley, I would think (Switzerland's) Nestle would be very interested in making a run into the United States, and this makes things much more affordable for them," said Samuel Weaver, finance professor at Lehigh University, who has expertise in the candy industry.
Of the five deals announced Monday, William Wrigley Jr. Co.'s agreement to buy the Life Savers and Altoids candy and mint businesses from Kraft Foods (Research) is the richest, valued at $1.48 billion. Shares of Wrigley (up $0.18 to $68.45, Research) gained on the news, reflecting the market's acceptance of the deal's value.
General Electric Co. (Research)'s agreement to purchase the fire-detection systems unit of SPX Corp. (Research) for $1.4 billion is the next most expensive deal announced Monday. But since it was seen as more expensive than expected, shares of GE were down slightly.
In addition, Wall Street Journal publisher Dow Jones Co. (Research) agreed to buy MarketWatch for $519 million, giving it CNN/Money competitor CBS MarketWatch.com. And Perrigo Co. (Research), a U.S. generic and over-the-counter drug manufacturer, used cash and stock to reach a deal to buy Israel's Agis Industries Ltd. in a deal valued at $818 million.
Those four deals marked the first time in six months that there were four acquisitions valued at $500 million or more announced on the same day, according to Thomson Financial. And Monday's deals were much higher profile than the four announced May 17.
The final deal announced Monday was Regis Corp (Research). agreeing to acquire privately held Hair Club for Men and Women for $210 million.
The breadth of the deals Monday is a sign that the future gains in M&A activity will not be concentrated in one or two sectors, Awad said.
"You've had build in economy and balance sheet since 2000," he said. "It cuts across all industries."
Still, experts don't expect deals to approach the $1.7 trillion level seen in 2000 any time soon, even with improved activity. Weaver said rising interest rates and the run-up in stock prices and company valuations will limit some deals from getting done.
"But all in all, when you consider pluses and minuses, I definitely believe acquisitions will be on rise for next few years," Weaver said.