A flurry of mergers today offers to shed light on the growing debate over the relative valuation of the market. Outside of strategic concerns inherent in any merger, whether or not companies are in fact buying one another is to many investors the ultimate arbiter of relative valuation. In an ideal world, corporate coffers would dry up when the valuations of publicly traded companies exceeded reasonable returns on capital. If the company's price is too high, no one in their right mind would actually try to purchase it. In the end, the ultimate value of the public market is whether or not the company as a whole gets bought out.
Public companies are on sale every day for six and a half hours while the stock market is open.
We currently enjoy a near-mystical combination of low inflation, low interest rates and moderate growth. This means that the financial assets represented by stocks have a powerful opportunity to generate significant earnings growth in excess of the guaranteed return on U.S. Treasuries. These are the decisions that really determine whether or not the market is overvalued or undervalued, regardless of where the current dividend yield sits. Below is a chart of the enterprise value to sales and earnings ratios for each of today's mergers, along with the overall profit margins each company has generated over the past twelve months. Without factoring in the debt that these companies assume when doing a merger, it can make the deal look a lot cheaper than it really is.