The common line is that the recent boomlet in corporate acquisitions is all about confidence. Sure, the growing faith among CEOs that the world economy is not about to seize up helps. But to confidence add cash, competition and crowd psychology.
The cash idling on large-company balance sheets, plus the cheap-and-ready cash on offer in the debt markets, are a potent fuel. Now that the post-crisis trauma is easing and the aftershocks calmed for now, corporate cash has quickly gone from seeming like a prudent cushion against hardship to a dead weight earning nothing.
It becomes quite easy for Comcast Corp. (CMCSA) to brag about purchasing the remaining 49% of NBC Universal from partner General Electric Co. (GE) for $16.7 billion in cash when that cash would otherwise be yielding nothing and losing value to inflation. Perhaps Berkshire Hathaway Inc. (BRK-A, BRK-B) and buyout firm 3G Capital agreed to pay a rich price in forking over $72.50 a share for slow-growing H.J. Heinz Co. (HNZ). But it’s not tough to justify swapping plentiful cash for a one-of-a-kind global brand in such times.
The competition for scarce corporate assets and brands is also playing out. There was pent-up demand for deals entering 2013. As noted in the CNBC video segment here, global M&A volume last year as a percentage of total world stock-market value was some 25% below the 10-year average, according to Goldman Sachs. That, on some level, represents many deals that made sense to CEOs a year ago yet weren’t proposed because of macro factors. Now that the world feels a safer place, the rush to choose one’s partner is on.
At this point in the business and profit cycle, transactional ferment is an intuitive and almost-mandatory element of a strong equity market. Corporate earnings have roughly doubled since the recovery began in 2009, profit margins are near historical peaks and organic growth is harder to come by, which should companies to “buy” revenue, and other companies to sell out to cash in on buoyant stock values.
For now, the market is willing to reward CEOs for striking bargains, which can lead to a self-reinforcing crowd psychology in favor of deals. In a half-dozen large transactions, announced in recent weeks, the shares of the acquiring company rose on the day of the news. These include the Heinz and NBC Universal deals, as well as Liberty Global Inc.’s (LBTYA) bid for Virgin Media Inc. (VMED), US Airways Group’s (LCC) merger with AMR Corp. (AAMRQ) and Cardinal Health Inc.’s (CAH) takeout of privately held AssuraMed. This reaction hints that valuations have so far been fair, and will encourage follow-on transactions.
While the chatter about a quickening merger pace often runs directly to conjuring the next possible buyout candidates, the reason the trend is supportive of the market is not strictly for way windfall profits accrue to the owners of target companies. The activity flushes cash into the market, resets valuations by factoring in the prospect of acquisition premiums and makes all companies more alert to the need to maximize shareholder value either alone or through the implicit threat of new ownership.
The cash portion of deals announced in the past month, including the $24 billion proposed management buyout of Dell Inc. (DELL), amounts to some $70 billion, far more than the amount that caused such excitement for flowing into stock mutual funds in early January.
There’s no guarantee that more mergers will automatically drive dramatically higher stock-index values, of course. But if we don’t see a busier M&A calendar, the bullish market momentum will almost assuredly wane - because it would almost certainly mean that either macroeconomic anxiety returned or credit markets soured.
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