Can Corporate Mergers Help Save the Weak US Economy?

The plodding US economy had one significant bright spot in the first half of the year—a bustling mergers and acquisitions market that stands a good chance of continuing through the second half.

Though the activity was a bit front-loaded in the first quarter, domestic M&A totaled $584.4 billion through June, the best since the pre-financial crisis days in the first half of 2008 and a 41 percent increase over 2010, according to Dealogic.

A number of individual industries—mining, for one—set records, taking advantage of low financing costs and cheap valuations either to expand their operations or swallow up weaker competitors.

Health care led the way for deals in the US, with $71.6 billion in M&A, led by the $21.5 billion Johnson & Johnson acquisition of Synthes.

With the twin burdens of 9.1 percent unemploymentand anemic gross domestic product growth, keeping a deal-friendly environment going could be key to salvaging economic prospects through the rest of the year.

"Companies are pretty cheap right now," says Randy Warren, chief investment officer at Warren Financial Service, in Exton, Pa. "The valuations are not stretched. They look attractive for acquisition purposes."

To be sure, M&A is no panacea for a sick economy.

Mergers between companies trying to streamline operations are generally not jobs-friendly, so more deals of that sort could exacerbate the jobless problem.

Acquisitions, on the other hand, can help create jobs when one company is looking to expand its operations by buying another in a related industry.

"The firm that has a bigger mousetrap has a bigger bank behind it to allow it to grow," says Steve Blitz, senior economist at ITG Investment Research in New York. "That type of merger becomes additive in terms of employment more quickly. You have that much more capital more quickly."

Should confidence remain low, that would cut into M&A prospects, Blitz says, echoing general concerns about the faltering economy and whether the consensus thesis will hold that the US is in a mere soft patch that will pass with time.

Interestingly, the depressed real estate marketwas the leader in global deal volume for the first half, suggesting that cheap valuations and low cost of capital rather than macroeconomic strength are dictating deal interest.

Real estate saw 1,406 deals worth $152.1 billion, marking the first time the industry ever led the M&A trade as it saw 21 deals with more than $1 billion, according to Dealogic.

Private equity, or "financial sponsor" deals, also were strong, with volume reaching $94.9 billion for the half, up 8 percent from the previous year.

Telecom was the third most popular sector, with $137 billion in volume, and is expected to remain a popular deal sector for the remainder of the year. The biggest first-half deal, in fact, was AT&T's announced $39 billion takeover of rival T-Mobile.

"If you see valuations in particular sectors that look too good to pass up, you'll definitely see some acquisitions and mergers there," Warren says. "It wouldn't be a surprise to see more significant ones in the technology space."

How all that bodes for the broader economy is a less certain call. For all its 2011 strength, M&A had a choppy year.

Volume dropped 20 percent in the second quarter from the first, though May gained 27 percent from April and reversed a two-month slide.

Investors, at least, seem to have enjoyed the M&A climate, pushing the broader market higherand generally rewarding deals with pushes higher not only in individual stocks but also across the major averages.

"Overall there is more confidence in the corporate board room today," Aryeh Bourkoff, head of investment banking at UBS, said in a CNBC interview. "The markets have been rewarding M&A. Investors are saying buybacks are not enough anymore."

Of course, that will depend on making good deals and on costs remaining low, a bit of an uncertain prospect now that the Federal Reserve has left the bond market.

For the economy, though, a strong M&A environment could prove a lynchpin to offsetting the other weaknesses.

"You just have to get the right mix of people involved," Warren says. "Somebody's got to want to move the needle."