The silver lining: Mergers & Acquisitions are coming to the Dow & Nasdaq in 2009.

For the last few weeks I have been trying to find a silver lining in the carnage of the Dow and Nasdaq. You wake to stories of Dow 7000, offensive AIG bonuses, and lost trust by the general public in Wall Street. Though all these things are real problems that may take years to overcome, I forsee a silver lining in the upcoming months through an increase in U.S. mergers and acquisitions.

The silver lining began to appear to me when the Roche/Genentech deal was being hammered out. Following that deal we saw Pfizer pay 60 billion for Wyeth in cash and stock, which was then met by Merck buying Bristol Myers Squibb a few weeks later. The market had simply done too much damage to the value of these competitors, that it became apparent for them it would be of greater value to use the cash on their balance sheets to acquire these discounted cash flows and product pipelines, than to invest their capital in R&D.

So pharmaceuticals are consolidating, why is this good for the Dow and Nasdaq in 2009? The silver lining is shining through with rumours of IBM doing the same math and acquiring Sun Microsystems for 8 billion in cash/stock, they will go from having 32% of the server market to 42% cheaper and quicker than trying to steal the marketshare from HP or Sun. Moreover, they get the Java platform and a few billion in cash off of Sun's balance sheet as a throw in.

Microsoft this week commented that an arrangement with Yahoo! may make sense again. Considering Microsoft is a distant third in search, and Yahoo! is second behind only Google's dominant position, it may make more sense for Microsoft to acquire Yahoo! for half the price it bid last year, than try to steal or build the equivalence of Yahoo's position. Or perhaps Ballmer just wanted to see how low the market could take the stock and hoped to watch Jerry Yang squirm for a while. But at the end of the day, Microsoft will be to save alot more cash and time thorugh layoffs and the synergies the merger of their search teams would make than trying to make KUMO (latest MSFT codename for new search engine) work.

I recommend looking out for these types of stories and others with the same types of economic advantages in oil, pharma, technology, and gold sectors. Key signs I look for are strong balance sheets to acquire weaker competitors with limited debt and strong cashflows/technology/marketshare. Moreover, access to credit markets is generally easier to get for multinationals, I imagine Pfizer called their bank to make sure the money was there before they put the bid out for Wyeth.

Lastly, as the US dollar begins to seriously weaken (and it will soon), these strong corporate balance sheets will see their buying power decline with it, thus, they will want to start spending it before we go back to seeing the canadian dollar at par, or the Euro at 1.60. That is why 2009 will be the year of the US merger and acquisition, domestically and abroad.

Disclosure: I own none of the names presented in this article at this time.