A while ago (in 2011) I had written elsewhere about the record levels of cash that US incorporated multinationals are carrying on their balance sheets. A combination of good global franchises, strong cash flows and inadequate opportunities to deploy surpluses had resulted in a pile up in recurring cash flows on balance sheets.
This meant two likely opportunities to deploy cash – (a) return capital to shareholders through dividends or share repurchases
(b) Wait for the right opportunities to make strategic acquisitions of solid brands. The point about the latter is that when sentiments are low and pessimism reigns supreme, lying low is an easy option – after all most business executives find it easier not to stick out their necks. But again, the problem with lying low for prolonged periods with surplus cash is that shareholders can get really edge and markets can drive down valuations (driving up the cost of capital) for such companies.
In the last month or so, we are seeing significant pickup in merger and acquisition activity in the US markets – some analysts interpret this as the surest sign yet that some green shoots of recovery in the US economy are becoming visible. Take this last fortnight or so – we have seen announcement of an LBO (leveraged buy-out) by founder Michael Dell of his very own Dell Computers, Berkshire and Brazilian 3G announcing a joint $ 28 billion acquisition of global brand Heinz, a $23 billion acquisition of Virgin Media by Liberty Global and a merger between US Airways and American.
As is evident, these are large deals in a diverse set of industries. Analysts are speculating that a whole host of deals may now be in the works signalling significant consolidation and deployment of cash – in fact deal announcements made so far in the first two months of 2013 have been the strongest yet for nearly a decade.
What’s really interesting is that the backdrop in which this spate of announcements is coming through is not all rosy. Recently the Conference Board (an independent US organisation of business / research interests) published a rather dismal January consumer confidence outlook based on a survey of US consumers.
In a follow up piece next week, I plan to reflect more closely on what’s driving the sudden surge in the M & A market and whether the surge is likely to sustain. Watch this space for more.
The survey reported an 8 point drop in consumer confidence representing a near wipe-out of any gains made in 2012. By far the US economy is not out of the woods. Clarity about definitive measures on reigning in the fiscal situation remains elusive and the financial sector continues to face significant challenges through tightening regulation and business contraction pressures.However, business confidence clearly seems to be bucking the trend.
At a high level, prolonged periods of low interest rates, easy access to financing for large cash rich corporations to lever deals, shareholder impatience and greater willingness by strategic investors to fund acquisitions appear to have converged so far in early 2013.