Merger Mania: Deals to Keep Flowing $1.1 Trillion Of Cash On Sidelines Says Barrons
SATURDAY, FEBRUARY 16, 2013
Merger Mania: Deals to Keep Flowing
By ROBIN GOLDWYN BLUMENTHAL
The fast start of the current year in M&A activity should continue, with S&P 500 nonfinancial companies sitting on $1.1 trillion of cash and investments.
Mergers and acquisitions have been on a tear, and judging by the $1.1 trillion of cash and short-term investments held by nonfinancial companies in the Standard & Poor's 500, the beat is likely to go on.
About two-thirds of this money is in information technology, industrials, and health care, according to S&P Capital IQ. Indeed, of the $185.3 billion in deals announced so far this year through Feb. 14, IT accounted for $33.4 billion, close behind consumer staples, at $33.8 billion. Consumer discretionary led the pack, at $52.5 billion, while health care contributed $9.0 billion, and industrials, $5.6 billion.
William Waitzman for Barron's
Cash-Rich: Companies that are sitting on $1.1 trillion of cash piles are starting to use it to make the most deals since 2005.
Just $58.1 billion of deals were announced in the corresponding year-earlier stretch.
In fact, this year's early M&A pace is the most torrid since 2005, before the financial crisis. And the surge is far from over. "Companies are looking to buy growth," observes Richard Peterson, an S&P Capital IQ director. He says that at least a dozen $1 billion-plus transactions have been announced already in 2013. Among them: The $23.3 billion buyout of H.J. Heinz (ticker: HNZ) by Warren Buffett and 3G Capital, and Comcast's (CMCSA) $16.7 billion deal for 49% of NBCUniversal. And Dell's (DELL) $24.4 billion plan to take itself private is also swelling the numbers.
"There are a lot of private-equity dollars sloshing around," says Joe Steger, head of global tech M&A at Ernst & Young. If favorable trends continue in leverage, "it should help give people a reason to do deals."
Aside from economic data, a rash of deals announced over the past 24 hours stole the spotlight.
H.J. Heinz Co. ( HNZ ), the food company known for its ketchup, agreed to be acquired by Warren Buffett's Berkshire Hathaway Inc. (BRKA) (BRK/A) and 3G Capital in a deal valued at $28 billion, including debt. Heinz shareholders will receive $72.50 per share in cash, a 20% premium to Heinz's closing price of $60.48 on Wednesday. Shares of Heinz rallied 20%.
In the airline sector, the parent of American Airlines, AMR Corp. (AAMRQ), and US Airways Group Inc. ( LCC ) confirmed plans to merge and create the world's biggest air carrier. US Airways shares declined nearly 5%.
In the consumer-staples sector, Constellation Brands Inc. ( STZ ) shares surged more than 37%. Beer giant Anheuser-Busch InBev NV (AHBIY) and Constellation said they've agreed on new terms for AB InBev's full divestiture of the U.S. assets of Mexico's Grupo Modelo SAB de CV.
The recent pop in mergers and acquisitions activity shows that money on the sidelines is becoming more expensive, said Doug Sandler, chief equity officer at Riverfront Investment Group.
"For retail investors, there's a real cost to having your money on the sidelines," Sandler said. "Corporations are just saying: 'I can't sit on this cash anymore.' Money sitting around doing nothing subtracts return on equity."
Postrecession, it's no longer acceptable for a corporation to have more than 10% of its value tied up in cash, Sandler said. This much was evidenced by the suit brought against Apple Inc. ( AAPL ) by activist investor David Einhorn.