Analysts Cautious as Merger Speculation Fires Up Markets

THE merger mania sweeping through the United States entertainment and telecommunications sectors is starting to have a broad impact on the stock market in general. Trading activity has been rising to record levels. Speculators are snapping up shares in companies with already high valuation levels.

In recent trading sessions the Nasdaq, Standard & Poor's, and the New York Stock Exchange composite indexes, and the American Stock Exchange index all hit new highs.

``We're seeing a lot of speculative buying out there now,'' says Arnold Kaufman, editor of The Outlook, published by Standard & Poor's Corporation. ``Volume on the Nasdaq has been running well out front of the Big Board [New York Stock Exchange]. That's a warning sign that this market may be getting very stretched,'' with a price drop possible in the near future, he says.

Last week's announcement of a planned takeover of Tele-Communications Inc. by Bell Atlantic Corporation has spurred interest in other cable, telephone, and entertainment firms. Share prices have shot up for such companies as Liberty Media, Time Warner, and Disney.

Larry Wachtel of Prudential Securities Inc. does not expect the buying frenzy to end soon. Stocks continue to be attractive relative to other investments. Corporate earnings are up. Billions of dollars in bank certificates of deposit must be rolled over in October. Some of that is expected to move into equities. The market is ``just a little frothy right now,'' Mr. Wachtel says.

So far, mergers and acquisitions valued at more than $226 billion have been announced in 1993. That is already twice the value of all mergers last year, according to Securities Data Company, a financial services firm in Newark, N.J. The merger wave of the 1980s began to taper off in 1989 (at around $300 billion annually), and then fell to just below $200 billion in 1990.

The current mergers, Mr. Kaufman says, differ from the deals of the 1980s that were financed largely by junk bonds. The new round of mergers, which began earlier this year with several takeovers in the entertainment sector, are being financed through higher stock prices. The takeovers and mergers of the late 1960s were also largely equity-financed.

But what concerns some analysts is that the current frenzy to snap up shares in companies that are potential merger candidates ``might be the very thing that shoves the market to its extreme faster than anyone thought,'' Kaufman says. It could then head downward in a huge selloff, he adds. Valuation levels are high, yet dividend yields are inching downward.

Falling yields often forecast a market decline. The yield on the S&P 500 is now running at 2.68 percent, which is close to the lowest modern level recorded - 2.64 percent - reached in August 1987 just before the market crash in October. In January 1973, the yardstick fell to 2.65 ahead of another major market correction.

James Stack, who publishes InvesTech, a market newsletter, is clearly concerned about the rush of speculators, including investors scrambling to buy into entertainment-telecommunications stocks in recent days. ``Many of these investors are not buying because the companies represent good value,'' he says.

Still, Mr. Stack says that the current frenzy will not by itself push the market into a correction. For that to happen, he says, interest rates would have to move upward. That is not yet occurring. But since consumer confidence is on the rebound in the US, there is the possibility of an uptick in interest rates in the months ahead, he says. Moreover, given the duration of the current bull market - now more than three years old - a correction cannot be totally ruled out, he says.

``We have to remember that there are a limited number of companies in the entertainment, telecommunications sector,'' says Gene Jay Seagle, a vice president with Gruntal & Co., an investment house. Although some speculative buying could go on for a while, the broader market should not be endangered, Mr. Seagle says.