"The acquisition activity reflects what has been driving the stock market for the last six months. That's liquidity, which is findings it way into the stock market through private equity and strong levels of corporate cash," said Hugh Johnson, chairman of Johnson Illington Advisors.
"There is a lot of M&A activity driving the market as well as positive earnings," said Art Hogan, chief market strategist at Jefferies & Co.
The Dow Jones Industrial Average was up 114.7 points, at 13,965, as 24 of its 30 stocks advanced, led by the likes of General Electric Co. , Procter & Gamble Co. , AT&T Inc. and Verizon Corp. .
Leading the gains among blue chips, shares of Merck jumped 7.8%. The pharmaceutical company lifted its annual earnings forecast and its quarterly results exceeded Wall Street's expectations.
Away from the Dow, rival pharmaceutical giant Schering-Plough Corp. was off nearly 0.2% after initial gains after its revenue and earnings per share both beat expectations.
Investors also awaited earnings from Dow component American Express Co. and key chip-maker Texas Instruments Inc. after the close.
The S&P 500 was up 10.1 points at 1,54 and the Nasdaq Composite advanced 8.9 points to 2,696.5.
On the New York Stock Exchange, 1.2 billion shares exchanged hands, while 1.7 billion were traded on the Nasdaq. Advancing issues topped decliners by a 17 to 15 ratio on the NYSE and were running near even on the Nasdaq.
By sector, multimedia semiconductor and hardware stocks led the advance, while natural gas and biotechnology stocks were on the decline.
After being rocky last week, credit markets were more subdued, with financial stocks mixed.
Investment Bank Goldman Sachs Group was off 0.2% , reversing course from its earlier climb. JP Morgan Chase Co. declined 0.7%, also after rising early on.
Citigroup Inc. was up 0.2%, while Lehman Brothers Holdings Inc. rose almost 1%.
The oil-services sector got a lift as two of the biggest names in the oil-drilling business, Transocean Inc. and GlobalSantaFe Corp. said they would merge in a deal creating a $53 billion oil-and-gas drilling behemoth.
GlobalSantaFe stock was 5.3% higher and Transocean shares rose 6%.
In other merger, news Barclays sweetened its offer for ABN Amro to $93 billion and added a cash portion to it. ABN shares gained 0.2%.
United Rentals Inc. stock rose 1.9%. The equipment-rental company is being purchased by Cerberus in a deal valued at $6.6 billion.
Hewlett-Packard Co. is buying Opsware Inc. , which makes automation software, for about $1.6 billion. The computer company said the deal will enhance its portfolio of business technology optimization software.
Shares of Tellabs Inc. were 5.3% ahead, after leaping as much as 15% earlier, on talk the company was a potential target of Nokia Siemens Networks, which reportedly is willing to offer up to $7 billion for Tellabs, which reports quarterly earnings Tuesday.
In other news, Wal-Mart Stores Inc. said it will slash prices on 16,000 items this week in preparation for the crucial back-to-school shopping season, and plans to roll out an advertising campaign to address how to save money amid still-high gas prices.
Treasurys fell, sending yields above recent seven-week lows, as the fixed-income market took a breather after safe-haven concerns fueled a rally last week. The 10-year benchmark note finished the day 3/32 off at 96 13/32 with a yield of 4.965%.
The dollar traded fractionally higher against the euro and the yen, coming off a record low against the euro and a six-week loagainst the yen reached during the Asian trading session. "Concern over subprime lending in the U.S. continues to dominate currency markets" as the new week gets underway, said David Jones, chief market analyst at CMC Markets.
The dollar stood at $1.3821, compared with $1.3825 late Friday. The dollar was quoted at 121.33 yen vs. 121.18 yen.
Crude oil futures fell under $75 a barrel amid eased concerns over global supplies. On the New York Mercantile Exchange, crude for September delivery declined 1.2% to close at $74.89 a barrel.
Gold futures edged lower, as traders locked in some gains. The August futures contract fell $2.20 to $682.50 an ounce.
On Friday, U.S. stocks dropped sharply amid worse-than-forecast results from Google Inc. and Caterpillar and nervousness in the credit market. But absent of new developments over the weekend, investors still focused on earnings.
By Kate Gibson