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Merger Activity Back, but Not Likely to Heat Up Market

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With animal spirits on the rise, companies armed with cheap financing are fueling a new merger wave, but that's not likely to do much to heat up the stock market.

The more than $23 billion buyout of Heinz announced by Berkshire Hathaway and 3G Thursday capped a week of active deal making. There was also the much-anticipated merger of American Airlines and US Airways Thursday, and Comcast's $16.7 billion deal to buy out GE's minority stake in NBC Universal (CNBC's parent). According to S&P Capital IQ, there are $190 billion U.S. announced mergers so far this year, compared to $58 billion at the same time last year.

(Read More: Berkshire Hathaway, 3G to Buy Heinz for $23 Billion)

Deal-related stocks gained Thursday, including a number of names in the food industry, like J.M. Smucker, General Mills and Campbell Soup, rising with Heinz. Constellation Brands jumped sharply after Anheuser-Busch InBev changed its merger proposal for Grupo Modelo to appease regulators. It now includes an expanded asset sale to Constellation, giving it a major brewery in Mexico and perpetual rights for Corona and Modelo brands in the U.S.

But even with all this activity, the stock market still traded in a tight range Thursday, held back by concerns about weak GDP data from Europe. The Dow was down 9 at 13,973 and the S&P was up 1 at 1521. The Nasdaq rose 1 to 3198, a fresh 12-year high.

On Friday, traders will be watching economic reports including the Empire State survey at 8:30 a.m. ET; industrial production at 9:15 a.m. and consumer sentiment at 9:55 a.m. There are also earnings reports from Campbell Soup, TRW Automotive, J.M. Smucker, American Electric Power and Enbridge. The foreign exchange market will be on the alert for headlines from the G-20 meeting in Moscow.

(Read More: Is the G20 Meeting Being Wrecked Before It Starts?)

Stocks head into Friday flat for the week, with the exception of the Russell 2000 which is up more than 1 percent and at an all-time high. The small-cap Russell is more closely tied to the domestic U.S. economy than the other major indices.

But with the Dow and S&P near all-time highs, the market is still looking for a catalyst to break to new highs. Merger activity should be supportive but not a major driver, some analysts say.

"I think this is another story of trying to balance the micro with the macro," said Gina Martin Adams, institutional equity strategist with Wells Fargo Securities. "Obviously, a deal is great for a few companies and could be extended to anticipate further take-outs for a larger swath of individual companies, but the reality is we still have to contend with major macro issues…Can we go so far as to say this deal today is going to spark a massive wave of M and A? Not really. We can get a little bit of optimism, but Europe takes it away."

(Read More: Euro Zone 2012: Not a Single Quarter of Growth)

Analysts are quick to note that the low interest rate environment, slow growth environment and big corporate cash hoards have combined to make it appealing for companies to do deals, or pay dividends and buy back their stock. "It is important to note that M and A volume size, transaction size, all increase as cycles mature," said Daniel Greenhaus, global market strategist with BTIG. "In retrospect, the peak of M and A is almost always the peak of a given market cycle. The appropriate way to look at this is whether there's ebullience or optimism in the M and A market. It's not the size of the deal, it's the valuation that's being applied."

So far, the valuations are not lofty and there is little chance the market will be caught up in a takeover fever. "M and A is beginning to come back. It's coming off a low base. There is room to go here. We're nowhere near the optimism" of past cycles, said Greenhaus.

Adams said she doesn't see an explosion of mergers but there should be a steady stream this year with the most likely industries involved to be consumer staples and energy. "The one factor that was missing from this whole cyclical recovery was M and A, and companies have pretty prime conditions," she said. She said the new wave of activity will probably be supportive of the market, but not much more unless the macro concerns are eliminated.

(Read More: Is the Dollar Dying? Why US Currency Is in Danger)

"It's really tough for these individual stories to spark much more than industry outperformance. Can they spark the whole market? Not so much," she said.

"If we started seeing financial sector M and A, that could be a truly bullish trigger and that's something I'd watch for," Adams said. "That's obviously the sector that suffered the most and still has regulatory pressure."

S&P Capital IQ's Richard Peterson says there's a chance for a strong year of merger activity unless the economy falters, regulators become more proactive on antitrust, or the Fed moves early to raise rates.

"Since the Lehman bankruptcy in September 2008 and the start of the credit crisis, there have been just 20 U.S. M and A deals worth $20 billion each announced. However, of those, six have taken place since mid-October, 2012," says Peterson, director of Director of Valuations and Risk Strategies, Global Markets Intelligence .

But it's not clear how much more activity there will be. "Whether it's Dell or Heinz, some of these are going to be treated rightfully as one offs," Greenhaus said. There's not going to be any more deals in the airline industry. They're at the end of their rope." Dell is in a deal to be taken private by founder Michael Dell and private equity.

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.