A leveraged buyout deal arrived Monday to finally break RJR Nabisco's 1989 record and test the waters for mega-LBOs in the pipeline. Such large, leveraged deals are a looming storm if you're a bond investor worried about all the new debt piling into the market. But for stock investors, the leveraged buyout trend could be your friend.

That was certainly the case Monday, as major averages leaped in reaction to news a group of private equity firms had bid to take hospital company HCA ( HCA) private in a deal estimated to be worth approximately $33 billion, including around $11.7 billion in assumed debt. RJR Nabisco went private for a total of $31.3 billion in 1989, including assumed debt. The HCA bidders include Bain Capital, Kohlberg Kravis Roberts and Merrill Lynch Global Private Equity. HCA's shares finished the day up 3.18%.

Investors should expect more mega-deals, as the private equity industry raised more than $200 billion in 2005 and aims to raise an additional $342 billion in 2006, according to a report by Private Equity Intelligence.

"We're operating on the assumption that HCA is probably not the only large transaction on the horizon," says Greg Peters, U.S. credit strategist at Morgan Stanley, who is responsible for the firm's monthly LBO Screen report, which methodically evaluates likely LBO targets.

Thus far this year, a record-setting $201.6 billion in private equity deals have been announced in the U.S., compared with $372.6 billion globally, according to Dealogic.

The trend may be a bullish sign. An LBO boom may support the argument that stocks are fairly priced, if not undervalued, and provide more evidence that balance sheets in corporate America are healthy. The pickup in deal announcements suggests private equity investors are keen on stocks at current levels.

Indeed, some of the LBO market's largest deals have been announced since U.S. stocks have retreated from their peak in early May. Energy company Kinder-Morgan ( KMI) and Spanish-language media company Univision ( UVN) announced their LBO deals on May 29 and June 27, respectively; both rank among the 10 largest LBOs ever. Kinder-Morgan's shares have climbed 19.24% since the deal was announced, and Univision's shares have gained 4%.

The stock market took a shine to the M&A mania Monday. The Dow Jones Industrial Average finished the day up 1.68%, to close at 11,051.05, while the S&P 500 added 1.66% to close at 1260.91. The Nasdaq Composite ended the day up 2.05% to close at 2061.84.

The big rally was the fourth such day of dramatic gains in the past six weeks. The prior three big up moves -- on June 15, June 29 and July 19 -- were characterized by a lack of follow-through. But the series of big up days and the blue-chips' ability to remain above their mid-June lows lend credence to a bullish outlook for stocks, say some technicians.

The HCA deal wasn't the only M&A announcement to spur enthusiasm. Chipmaker Advanced Micro Devices ( AMD) also announced plans to acquire ATI Technologies ( ATYT). AMD ended the day down 4.76%, but ATI gained 18.78%. Also, money-management company Amvescap ( AVZ) announced plans to acquire billionaire investor Wilbur Ross' WL Ross & Co. for as much as $375 million. Amvescap's shares gained 5.36%.

The brokerage and investment banking industries are fueling the mega-deal fire as well. "The dealers are elephant-hunting," says one banker, who declined to be named. "Getting a big LBO deal like HCA's is a feather in a bank's cap from both a fee perspective and a prestige point of view."

The brokerage and banking stocks gained sharply Monday on the M&A announcements. Shares of Merrill Lynch ( MER) gained 1.63%, while Goldman Sachs ( GS) gained 3.42%, Morgan Stanley ( MS) climbed 2.74%, Deutsche Bank ( DB) gained 3.56%, and Lehman Brothers ( LEH) rose 4.2%.

All the hype prompts the question, "Who is next, and when?" Any company with good cash flow and a relatively depressed stock price is next, say analysts.

Bankers have focused on tech ever since SunGard went private in a $11.3 billion deal last year and since deals for Affiliated Computer Services ( ACS) and Computer Sciences ( CSC) fell through late last year.

The tech sector has bucked the notion that the industry's reliance on research and development keeps lenders at bay. Investors are changing their minds about tech, as evidenced by large companies like Oracle ( ORCL) and Cisco Systems ( CSCO) completing public debt deals for the first time in the last couple of months.

A leveraged buyout in the auto industry isn't so far-fetched, either. Some private equity investors have snapped up auto-supplier assets already, and Morgan Stanley's LBO screener recently added suppliers Dura Automotive ( DRRA) and Lear ( LEA) to its list of potential targest.

Even Ford ( F) could be a target given the right deal with the United Auto Workers union, says Glenn Reynolds, analyst at independent research firm CreditSights. "It is an interesting white-board exercise," he says, adding that such a deal would open up many opportunities for alliances "of the sort we are seeing in the headlines."

"The problem is we have to live in reality and not on white boards," Reynolds says.

In the same vein, the HCA deal will be a reality check for the markets. Credit investors will decide whether or not to finance such a large LBO, and stock investors will have to decide if mega-M&A really is a bullish signal or whether the glass goes back to half-empty tomorrow.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click here to send her an email.