Goldman says U.S. stocks primed for takeovers

Mergers and acquisitions among U.S. companies are poised to rise, according to Goldman Sachs Group Inc., which said shares are cheap and executives have cash.

"Stocks look inexpensive," a group of six Goldman Sachs analysts, including Anthony Carpet, wrote in a note Tuesday. "A combination of rising global GDP, improving equity sentiment and CEO confidence augur a significant pickup in M&A into 2010."

More buyouts are likely even after the Standard & Poor's 500 Index rose 58 percent since March, its steepest rally in seven decades. While the increase pushed the average price- earnings ratio for companies in the gauge to 20.3, the highest level since 2004, Goldman Sachs says most stocks remain cheap relative to their valuations in the last 10 years.

Confidence among U.S. chief executive officers rose in the third quarter to the highest level in five years on expectations the economy will keep improving, a survey by the Conference Board showed last week. The U.S. economy, the world's largest, will probably grow at an average 2.8 percent annual pace in the last six months of this year, according to the median estimate of economists surveyed by Bloomberg News this month.

"Companies accumulated historically high cash balances over the past twelve months as they sought stability in face of an uncertain macroeconomic environment," Goldman analysts wrote. "Cash-rich balance sheets are ripe for use."

As the economy emerges from the worst recession in 70 years, cash flow may rise from the $1.5 trillion reported by the Commerce Department for the year ended in June, according to data compiled by Credit Suisse Group AG and Bloomberg. The amount reached a record in the past 12 months amid the biggest wave of firings since World War II and central bank interest rates near zero percent.

Banks, brokerages and investment firms are the most likely to see M&A increases, Goldman Sachs's analysts wrote. They cited Lazard Ltd., the investment bank led by Bruce Wasserstein, and Blackstone Group LP, the world's largest private-equity firm, among the financial companies with most exposure to deals.

"More accommodative capital markets should provide a solid underpinning for M&A activity," Goldman Sachs analysts wrote. "We see tightening spreads and increased issuance as the key cornerstones."