With Cash in Abundance Strategics Are on the M&A Hunt
Posted by Carl Doerksen on Tue, Mar 09, 2010 @ 10:17 AM
As we have posted before, strategic players are sitting on large sums of cash because of the cost cutting strategies implemented in 2008 and 2009 (Strategic Buyers and Cash - February 2, 2010). Now the question becomes what will they do with all that cash?
According to a recent article in the Wall Street Journal, one option will be to aggressively pursue acquisitions. As the Wall Street Journal put it, one year removed from the trough of the recession, American corporations continue to hoard more cash than ever. There are now tentative signs that they are finally comfortable using the money to do some shopping.
The 382 nonfinancial firms in the Standard & Poor's 500 that have reported results for the fourth quarter of 2009 are now holding $932 billion in cash and short-term investments, according to a Wall Street Journal analysis of data from Capital IQ. That sum is up 8% from the third quarter and up 31% from a year ago.
At a time of low interest rates, reopened credit markets and growing optimism about the economy, CEOs and their boards seem to be questioning the wisdom of sitting on all that cash. And with the S&P 500 still trading 29% below its October 2007 peak, companies are deciding that cash is their preferred currency for acquisitions-rather than shares they see as undervalued.
After a season of saving for a rainy days, some corporations are starting to become more comfortable with spending money and hunting for new deals, Money & Investing deputy editor Dennis Berman reports. "We are sitting on a lot of cash and generating a lot as well," said Wade Miquelon, chief financial officer of drugstore chain Walgreen Co., which last month spent $618 million for the New York City drugstore chain Duane Reade. "Sitting around on all that cash and have it earning very little interest really does not make a lot of sense."
Like a lot of U.S. companies, Walgreen cut costs during the past year, in its case halting store openings and reducing inventory. Mr. Miquelon said the moves saved the company about $2 billion in cash-freeing up money it later used in the Duane Reade deal. "We are conservative with our cash, but hoarding it right now isn't probably the best use of it," he said.
That wasn't the corporate approach for the past two years. As the economy suffered in 2009, corporate executives assumed a defensive crouch, cutting jobs and capital spending, waiting to survive the storm. Alcoa Inc., for example, pegged top executives' 2009 compensation to goals for increasing the company's stash of cash, according to regulatory filings. Because of this, despite a 31% drop in revenue, Alcoa nearly doubled its cash to $1.5 billion during the year.
The most visible use of cash is coming in the mergers arena. When taking into account all the money spent on deals, 55% of the consideration during 2010 has come in the form of cash. That number was 40% in 2009. The highest figure during the past decade was 57% in 2007, at the height of the leveraged-buyout boom, according to Thomson Reuters.
"In many cases, if you use cash for share buybacks or dividends you are signaling to the market you don't have a better use for the cash," said Paul Parker, Barclays Capital head of global M&A. "For most CEOs, that message is the last one they want to send."
Among the all-cash deals to be completed this year: Bank of New York Mellon Corp.'s $2.31 billion purchase of a PNC Financial Services Group Inc. division, and Diamond Foods Inc.'s $615 million purchase of Kettle Foods Inc. last week. Other all-cash offers made this year, but not completed, include Air Products & Chemicals Inc.'s $5.12 billion hostile offer for Airgas Inc. and hedge fund Elliott Associates' offer this week to acquire technology provider Novell Inc. for $2 billion in cash.
"The specter of late 2008 was still fresh in our minds, but we felt more comfortable using cash now because we are seeing some positive signs of where the economy is going," said Sal Ianuzzi, chief executive of Monster Worldwide Inc., which on Feb. 3 announced plans to acquire Hotjobs.com from Yahoo Inc. for $225 million in cash. The online job site was sitting on $250 million in cash, had access to about $300 million in a credit line and felt like it could get even more if needed.
Mr. Ianuzzi said that he and other CEOs also expect their shares will move higher so it is better to use cash now for deals. "Our view about the economy also makes us think our stock is undervalued. So you take what your shares trades at now ... and you compare that to the cost of cash and financing that cash. For us, it was pretty easy decision to go with all cash," he said.
The data discussed above can be seen visually in the following chart:
As shown, the amount of cash sitting on the balance sheets of nonfinancial firms is an astounding $932 billion. Obviously, not all of this will be used to fund acquisitions. Many firms will continue to horde it for fear of a double dip recession. Others will use it to buyback stock (although as mentioned, some CEOs may not want to send the message that this is the best use of their cash).
The really good news for middle-market business owners is that given the typical size deal in this niche, cash will begin to make up an even bigger part of the overall deal structures used by corporate buyers. Simply put a deal valued below $20 million is more easily closed using cash than a deal valued at $200 million.
Because of information like this, it is time for you to begin exploring your exit plan options. We find that too many middle-market business owners do not have an exit plan in place to take advantage of situations like this. If nonfinancial strategic players are sitting on over $900 billion in cash, and are looking to make acquisitions, it is imperative that you begin to plan for your exit in the next cycle. Don't wait until a crisis forces you to sell your company. Be proactive and contact The March Group so we can help you get started on your exit planning process today so you can be one of the business owners that "cashes" in on the cash being horded!
http://online.wsj.com/article_email/SB10001424052748704541304575100070504794264-lMyQjAxMTAwMDAwNDEwNDQyWj.html