NEW YORK (Real Money) -- Too many of everything!
That's right, we have too many of everything in this stock market and in the real economy. So when we cull the weak and let the strong survive, when we merge companies out of existence to eliminate overcapacity, we go higher.
That's why hardly a day goes by without a deal of some sort to recognize that the CEOs of this country are well aware of the overcapacity.
Monday we learned that the publicly traded company of Ann Taylor (ANN) will be disappearing within the confines of Ascena (ASNA) for cash and stock. The deal, which gives shareholders a huge 21% premium, will be fabulous for Ascena because it needs a higher-end offering to complement its current iterations and it can save money immediately. Ascena's talking about saving $150 million in synergies over three years, but I think it will be more than that because I am sure CEO David Jaffe, who is on Mad Money Monday night, will be able to figure out which stores are winners and which ones are not needed. That's a tough thing for Ann's management to do, but it is expected now that Ascena's taking it over.
We know apparel's been weak. Some of that is that people are being more frugal. Some of that is because there are many purchases online that steal from bricks-and-mortar sales. But let's face it. We all know we are overstored in this country. This move will take out some stores and rationalize.
Or how about Par Pharma getting bought by Endo International (ENDP) Monday morning? There are way too many companies making generic drugs. We've got Endo and Par and Perrigo (PRGO) and Mylan (MYL) and Teva (TEVA) and Actavis (ACT) and Valeant (VRX) all in that business fighting for shelf space and pharmacy benefit manager share. So Endo shells out $8.05 billion in cash and stock to snare Par.
At the same time, we know Mylan's trying to buy Perrigo and Teva's trying to buy Mylan. Now Mylan has rejected Teva's bid, and I don't think there's much hope for that deal. But I do think Mylan will manage to get Perrigo in a deal that will represent a quantum leap for Mylan and will be terrific for Perrigo shareholders. Most important, though, will be a potential lift in margins from these warriors who have always been pitted against each other.
We know there's already fervid acquisition activity in the biotech world, with Alexion (ALXN) last week paying $8 billion for Synageva (GEVA), or 136% higher than where it was the day before. Not that long ago, we saw AbbVie (ABBV) buy Pharmacyclics (PCYC) for stock and cash in a deal so large that it crushed the acquirer. But now the stock is all the way back to where it was, so others, perhaps even Johnson & Johnson (JNJ), which suddenly has a red-hot stock ahead of a meeting this week, might be willing to do something bold without worry, as we know they, too, were interested in Pharmacyclics.
Meanwhile, Gilead's (GILD) got billions and billions of dollars in spare cash to make a transforming acquisition, which is a major reason why its stock has been breaking out in the last week. An acquisition could be spectacular for a company that now seems to be pigeonholed as nothing more than a hepatitis-C combatant.
You want an industry with too many companies? How about the semiconductor industry? This group's been a tremendous source of pain for many years, that is until we started to see some mergers, like the Triquint (TQNT) and RF Micro (RFMD) combination and the Cypress (CY)-Spansion (CODE) deal, as well as the NXP Semiconductor (NXPI) purchase of Freescale (FSL) and Avago's (AVGO) buy of LSI. All these companies either competed against each other or could present themselves as a one-stop shop to potential customers.
That's why when I first heard that Intel (INTC) was in talks to buy Altera (ALTR), I thought, "Hmmm, that makes a ton of sense." Intel needs to up its intellectual property content of its chips and needs to be a bigger factor in the high-growth areas of telecom, wireless, networking and industrial automation.
I figured that even if Intel offered a high price for Altera, it would be good for Intel's stock. Altera then apparently balked, but CNBC's David Faber told me Monday morning that they are talking again, principal to principal, and that something could get done.
This is a huge deal and it will most likely spur even more consolidation, as we learned from a Reuters story last week that postulated that the acquisitive Avago is taking a hard look at buying Altera competitor Xilinx (XLNX) or perhaps Maxim Integrated Products (MXIM).
How important are these deals? I never really cared for RF Micro or Triquint because they were always killing each other. But when you saw that last quarter, you knew the combination is a palpable one and pricing is no longer an issue. In fact, these two companies are able to raise price, quite a switch from what's been going on for years in these companies that provide parts to cell phones. I expect that to be the case for all these deals, which is why I don't mind even if Intel pays high for Altera.
You can see that even a whiff of consolidation in this industry can drive the stocks higher. No one thinks that Skyworks (SWKS), my favorite in the cell phone provider stocks, is going to do a deal, but the idea that there could be fewer companies vying for business shows that the environment won't be cutthroat and new combinations won't bother to compete with Skyworks. The merged companies can grow through acquisition and share take and don't have to encroach on Skyworks' turf to satisfy those shareholders demanding ever higher content in a cell phone.
Just last week, we saw the amazing results you can get from a merger when Zebra Technologies (ZBRA) bought Motorola Solutions' (MSI) enterprise business, which consolidated the barcode business. Two companies, same business, better prices for the combined entity.
I like every single one of these combined companies because they offer a ton of upside regardless of how the overall market does, which is why they resonate so amazingly with the sector.
It's why I am still a believer that there will be a whole bunch of acquisitions in the online space after Verizon (VZ) bought AOL (AOL) for $4.4 billion. How can there not be someone big trying to put together that ultimate hospitality vertical of Yelp (YELP) and GrubHub (GRUB) for where to eat and how to get it to you, or Expedia (EXPE) and Yelp or Priceline (PCLN) and Yelp for where to stay and why?
Who else needs to merge? How about the companies that Target (TGT) called in to say it isn't going to promote their sugary goods as much as before? The Wall Street Journal says Target let Campbell's (CPB), General Mills (GIS) and Kellogg (K) that it wasn't going to emphasize their goods as much as they might emphasize granola and yogurt. Hmmm, that sounds an awful lot like what Hain Celestial (HAIN) currently serves up and that Gregg Engles at WhiteWave (WWAV) will be selling soon, with is red-hot plant-based yogurt. Can these old-line companies really just stand there and let these newcomers take share? There are no longer any tax restrictions on WhiteWave, and we know that Credit Suisse (CS) just rolled out a buy this very morning. That upgrade was suspiciously thin, by the way, as if there was some motivation to get the recommendation out immediately. Hmmm.
Now I know there's plenty of other areas that are ripe for consolidation. We have way too many banks, but the federal government might not want any bigger banks than we have. We thought we would see a lot of movement in the oil patch, but so far all we have is Royal Dutch (RDS.A) buying BG Group (BG) and Noble (NBL) buying Rosetta (ROSE).
But you have to start somewhere.
Now, if these deals were all isolated and one-off, I don't think they would impact the market. However, when they are as pervasive as we see them and as far-ranging as they are, they actually can determine the direction of the market with their power.
And that's exactly what's happening now.
Editor's Note: This article was originally published at 3:24 p.m. EDT on Real Money Pro on May 18.