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Announcement
ACG Conference June 16th
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Market Overview
After falling 205.28 points during the previous week, the Dow Jones Industrial Average last week rebounded 331.79 points, or 3.3%, to 10471.91. That was the biggest weekly gain in six months, although major indices still are below where they started the year. The other major indices also had positive weeks with the Standard & Poor's 500 index rising 3.05 and the Nasdaq composite index up 3.52 percent.
The optimism in the market is largely driven by positive numbers on the state of the US economy. Data released on May 5 by the Bureau of Labor Statistics show output per hour rising at a 2.9% rate over the past 10 years. Coupled with the current loose labor market the productivity news assuages some of the inflationary fears that have recently been serving as a drag on the market. The economy also generated a larger-than-expected 274,000 new jobs last month and upward revisions to the February and March payroll data, totaling 93,000, have put the monthly pace so far this year at 211,000. These recent economic indicators support the idea that the expansion of the economy is continuing unabated.
Despite the economic news and recent performance of the market bearish sentiment remains strong on Wall Street, as short-sale levels rose to a record on the New York Stock Exchange. For the period ended May 13, the number of short-selling positions not yet closed out rose 1.5% to 8,568,572,977 from 8,439,004,525 in mid-April. So far this year, short selling is up more than 11% at the NYSE signifying that there is continuing concern about the state of the economy and economic factors that have driven the recent volatility of the US equity markets.
Merger Activity
The recent phenomenon of private equity firms cooperating on large acquisitions continues this month with Maytag’s recent announcement that it will be taken private by an investment group led by Ripplewood Holdings LLC in a deal valued at $1.13 billion. Ripplewood and fellow investors RHJ International, GS Capital Partners and the J. Rothschild Group of Cos. also plan to assume $975 million in Maytag debt. The deal values Maytag Corp. at $14 a share, a premium of approximately 20% of its trading price at the time of the announcement.
The take private transaction will allow Maytag time to address its structural problems, namely labor costs that are considerably higher than its competitors. Only 12% of Maytag’s products are made abroad, putting it at a decided disadvantage when competing against firms such as Whirlpool and GE who have considerable low cost international manufacturing capabilities.
Another recent high profile transaction is the announced merger of US Airways and America West Airlines. The two carriers valued the equity of the combined airline at $850 million, and the implied value of $6.12 per share for America West suggested a premium of 27% over the $4.81 share price before the deal was announced. The merged airline, which would be run by Doug Parker, America West's chief executive officer, contemplates $600 million in annual synergies resulting from route restructuring, cost savings and additional revenue. The company envisions these synergies will allow it to be profitable even with oil topping $50 a barrel.
Analysts have reacted cautiously to the news of the impending deal, noting the integration difficulties that have arisen in past airline mergers and questioning some of the revenue synergies identified by company management.
