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M&A rebound: Greed is back. But is it good?

By Paul R. La Monica, editor at large


NEW YORK (CNNMoney.com) -- The long-awaited sequel to "Wall Street" is finally due to hit theaters next month.

But Gordon Gekko may not be the only financial relic of the 1980s that's making a comeback. Takeover activity seems to be picking up at a fast and furious pace lately despite an uncertain economy.

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There were a flurry of takeover bids and rumored deals making news Tuesday.

Most notably, Australian mining titan BHP Billiton (BHP) announced a $38.5 billion offer for Canadian fertilizer company Potash, a bid that Potash (POT) rejected as "grossly inadequate." (Oh, snap!)

Still, shares of Potash surged on the news and so did the stocks of many other fertilizer makers as investors bet on the possibility of a Potash bidding war and other agribusiness deals.

Also Tuesday, Hefty trash bag maker Pactiv (PTV) shot up 5.5% after it agreed to sell to Reynolds Group, a subsidiary of New Zealand investment company Rank Group.

And Buffalo regional bank M&T (MTB) gained 5% following a report in the Financial Times that suggested the on-again/off-again takeover talks between M&T and Spanish financial services firm Banco Santander (STD) were back on again.

All this comes during what seems to be a busier than usual August for mergers and acquisitions. Dell (DELL, Fortune 500) bought storage company 3PAR for nearly $1.2 billion. Private equity shop Blackstone (BX) acquired energy company Dynegy last week.

But does a return to the "greed is good" era of corporate wheeling and dealing do any good to the average person on Main Street? Or even investors for that matter?

History is littered with examples of companies who made acquisitions that turned out to be enormous mistakes. Sadly, my parent company Time Warner is probably the textbook example of a big deal gone horribly wrong.

Despite all that, some experts said it is an encouraging sign that companies are looking to invest in the future even though there is a lot of negativity about the global economy.

"The time is right for acquisitions. Strategic deals today make sense. It's not just about empire building," said Tim Harder, chief investment officer with Peak Capital Investment Services, a financial planning firm in Denver. "Valuations have been low and anything a company can do to get some value by using the record levels of cash they have can be a positive."

Harder said that the increase in merger activity is a sign that the worst may be over for the economy even though it clearly does not feel like that just yet. He said investors and consumers need to remember that there's a difference between a sluggish recovery and another recession.

Companies appear to be betting on the former, not the latter.

"People may be confusing economic bad news with it being a bad time to invest," he said. "There is a lot of negativity but the economy is headed in right direction. It's just heading there very slowly"

Stephen Roddenberry, a partner in the merger and acquisition practice with the law firm Akerman Senterfitt in Miami, also said that the recent M&A boom is a sign of corporate confidence.

He pointed out that the fact that many companies are not just willing but able to do deals is in stark contrast to two years ago during the peak of the credit crisis.

"Companies that wanted to do deals a year or two ago but put them on the shelf can now go forward and make acquisitions again," he said.

Along those lines, the Federal Reserve did report Monday that banks are finally relaxing credit standards for small businesses and other corporate loans. And as many have pointed out, big companies are flush with cash.

Still, not everyone thinks that a wave of mergers is a good sign.

Drew White, chief financial officer with Sageworks, a financial analysis firm in Raleigh, N.C., points out that companies would be better off using their cash to invest in capital and hire back people laid off during the recession. In fact, he said that mergers could lead to even more job cuts.

"It would be nice if companies with a lot of cash started investing in growth. If you buy another company, the benefit is for the bankers and lawyers and stockholders. You may even lay off more people in order to reduce overhead costs," White said.

But White conceded that mergers can be a good thing -- especially when they can give struggling companies a life preserver.

Hewlett-Packard's purchase of Palm may wind up being a great example of that. Before HP scooped up Palm, many tech experts doubted Palm could survive much longer given how far it had fallen in the brutally competitive smartphone business.

"It's better for some companies to be bought and absorbed by a larger one then for them to fail and go away for good. That could save jobs," White said.

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, La Monica does not own positions in any individual stocks.  To top of page

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