(February 11) – “There are two great questions that have to be asked of this soaring stock market.The first, and most important, is when does the bubble burst for technology and telecom plays,” writes Andrew Willis in today’s Globe and Mail.

“On that score, you’re not going to find much insight here. Research In Motion seemed overvalued a few weeks back, when its market capitalization hit $5-billion, putting it on par with Inco. Yesterday, the pager marker was worth $11.4-billion, which meant it’s nipping at the heels of the value accorded blue-chip Bank of Montreal. Go figure.

“However, another fundamental issue is can an unprecedented volume of mergers and acquisitions keep driving stocks higher? On this topic, the answer seems to be yes, the takeovers are going to keep coming.

“Late yesterday, it was clear that a deal was brewing between paper makers Donohue and Abitibi-Consolidated. The stock price of both was up sharply prior to the imposition of trading halts on the Toronto Stock Exchange. A major merger like this can only hasten the pace of consolidation among Canadian resource companies. Dig deeper, and you’ll find other reasons that fuel will keep being heaped on the takeover fire.

“Yesterday saw the release of a survey that showed U.S. leveraged buyout funds expect to raise a record amount of capital this year. Established funds such as Thomas H. Lee Co. and Forstmann Little & Co. are in the process of pulling in $5-billion (U.S.) each. At this pace, the industry will surpass the record $57.2-billion raised in 1998.
For Canadian content on this front, one only has to look at Onex Corp.

“The leveraged buyout specialist has a great deal of cash in its own kitty for large-capitalization deals, and recently launched a $400-million (Canadian) fund called Oncap, with the proceeds earmarked for financing small-cap companies.

“All you need to know about buyout funds is that they don’t earn serious fees until they actually do deals. This money is hot money. For the foreseeable future, no one is going to have a problem financing a takeover.

“Changes in the world of institutional investors are also fuelling deals. There’s been a small
but telling move in the way money managers value companies, and it encourages bold combinations.

“In simple terms, earnings per share are no longer the key tool used to value stocks. Cash earnings are becoming an accepted basis for determining stock prices. This change is critical to executives considering big acquisitions.