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The Merger Message
M&A deals spell trouble for Bush-bashing liberals.


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Larry Kudlow

The liberal media and the Democratic presidential candidates jumped all over the latest jobs report, which showed a rise in unemployment to 6.4 percent. Screaming for President Bush’s head, liberals are trying to make the case that failure in the economy will lead to the president’s re-election defeat next year — the same fate suffered by his father over ten years ago.

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But this group of harpies — the gang that can’t shoot straight — is overlooking a number of market-oriented signs that point to a robust economic recovery. This resurgence is likely to begin in the second half of this year, and reach full bloom in 2004.

This crowd couldn’t even get the jobs report straight. Outside of that higher unemployment figure, big gains were registered by temporary workers and the self-employed, both leading indicators of better jobs performance in the future. Significantly, 251,000 people re-entered the labor force in June, a confidence sign as hopes were raised by the new tax-cut package and its promise of new employment.

Meanwhile, Democratic presidential wannabes talk of recovery-wrecking moves such as repealing the tax cuts and using homeland security as a nationwide pork-barrel spending fund. The Democrats have also managed to block limits to non-economic medical malpractice awards, a measure that would have cut health-care costs enormously.

Always favoring government over markets, the liberals also continue to ignore the huge stock market rally. In itself, the surge on Wall Street is signalling a stronger economic growth rate in the future. But Democratic doomsayers conveniently refuse to acknowledge that lower tax rates always increase the after-tax value of equity assets, a process quickly discounted by the rising stock market.

Representing claims on the future value of American business, the boom in share prices signals improved credit quality and better financing power, two vital ingredients for stronger economic activity and new job creation. Confirming this, Goldman Sachs released a survey showing the highest confidence reading by corporate information-technology officers in two years, a sure sign that capital spending will recover. Also, the Conference Board’s latest CEO survey indicates the highest confidence level since 2001.

Here’s the simple formula liberals don’t get: Lower tax rates increase stock prices, and those rising equity values quickly open the door to new business expansion, including job creation.

So, it’s not surprising that a virtual avalanche of new merger-and-acquisition deals — including hostile takeovers — has followed fast on the heels of the Bush tax-cut.

In the new information economy, software maker PeopleSoft made a bid to acquire J.D. Edwards and Co. Shortly thereafter, Oracle announced a takeover of PeopleSoft. And storage leader EMC Corp. will acquire Legato Systems, Inc.

In the old economy, aluminum producer Alcan launched a hostile bid for French rival Pechiney. Trucking company Yellow Corp. said it would buy rival Roadway Corp. And autoparts maker ArvinMeritor announced a hostile bid for competitor Dana Corp.

In the financial world, Lehman Brothers seeks a friendly purchase of Neuberger Berman, and Citigroup may acquire another investment management company, Boston’s State Street.

All these deals point to growing business confidence in a solid economic recovery. After a dismal three-year stock market downturn, largescale consolidation in corporate America is an efficient way for excess capacity to be absorbed. Business leaders have decided that it’s cheaper to acquire firms and their assets than to replace or build new ones.

Following the recent stock market bottom, the attitude in the business world is: Now is the time to strike. Noteworthy is the fact that acquiring companies are opting to purchase firms in their own industries — where they have great knowledge and experience — rather than build over-diversified, far-flung empires. The latter was the case in the late 1990s, when the disease of excess conglomeratization led to massive shareholder losses.

The re-emergence of M&A deal activity is also an efficient way to price the true value of companies. An asset is only worth what someone will pay for it, and right now takeover companies are willing to pay high price premiums. At the margins, buyers of companies are establishing reliable market-price estimates in all sectors. This will permit individual investors re-entering the market to be better informed about fair-value market pricing.

This vibrant merger activity has a precedent. A similar wave appeared in the early 1980s when another round of across-the-board tax cuts ushered in the great Reagan bull market. That deal-making activity more than two decades ago heralded a phenomenal boom in economic growth, job creation, and investor-class wealth creation. That boom lasted nearly twenty years.

Judging from the hot new market in deal-making right now, it looks very much like history is about to repeat itself.

Liberals beware. 



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