Ask Matt: M&A activity continues to be weak

— -- Q: Now that stocks are languishing, are more companies going to be bought by larger rivals and other investors?

A: There's nothing like a sale to lure shoppers into a store. But oddly, when stocks go on sale, there's no rush of buyers through the door.

It's one of the strangest aspects of markets. Investors get most excited about buying stocks when prices are rising or even peaking. And when stock prices are falling, making investments more attractive, buyers often sit on the sidelines and wait.

Investors don't need to look very far back to see how merger and acquisition activity often picks up when stock prices are high, not low. The best recent example of the bad timing of buyouts occurred in 2007, just as the stock market was about to peak. There was a boom in buyouts that year, powered largely by private-equity investors.

While stock prices were still relatively high at that time, buyers were perhaps overly confident they could buy these companies and flip them for a gain. Meanwhile, these private buyers were enabled by low borrowing costs, which allowed them to use debt and buy companies and pay very low interest rates.

But what about in 2009, when stocks were bottoming from the crash induced by the financial crisis? Did big companies and investors take advantage of the lower prices and buy? Of course not. U.S. M&A activity continued to fall all that year, dropping from about $250 billion in the first quarter of 2009 to less than $200 billion in the second quarter and roughly $130 billion in the third, says Dealogic.

M&A activity has continued to be weak the past few quarters and was $170.7 billion in the first quarter of 2012, down 37% from the first quarter of 2011, Dealogic says. That's the weakest showing since the third quarter of 2009. But this was one time that rising prices did not boost M&A activity, because the stock market had a solid first quarter.

The question now is whether big buyers will step in as the stock market has been suffering for more than a month. Based on recent history, it might take awhile for this pool of ready and able buyers to arrive. When the economy slows, big companies tend to preserve their cash and get nervous about making big acquisitions.

Typically, with interest rates as low as they are currently, private investors would be expected to step up and start buying. But since so many of them overpaid at the last market top, they're not in the flush position financially that they were in 2007. Many private investors are still trying to unload the companies they bought at the last market top. And unloading companies might be even tougher now that the initial public market offering has stalled, in part, to the poor showing of the Facebook deal.

All this means is that it is unlikely that M&A will be the force to put a floor in for stocks amid the recent downdraft. Investors will need to see signs that the global economic slowdown isn't going to be as bad as feared. Only after the markets get their footing, can investors expect to get a little bump from M&A activity.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz