Cash-Rich Corporations Drive M&A to Next Level of Sustained Cycle

By Platt, Gordon | Global Finance, July/August 2011 | Go to article overview

Cash-Rich Corporations Drive M&A to Next Level of Sustained Cycle


Platt, Gordon, Global Finance


Corporate Finance Focus

Corporations worldwide are using their cash stockpiles to make acquisitions and are driving M&A activity to a higher level that confirms the bullish trend that began in 2010, analysts say. The momentum of increasing deal volumes is expected to continue in the months ahead.

In the US market in the first five months of 2011, the total value of M&A transactions rose 39% from the same period a year earlier to $454 bilHon, according to PwC, formerly PricewaterhouseCoopers. Meanwhile, an increasingly competitive environment for deals and improved business confidence among buyers contributed to a 45% increase in average deal size in the same period.

"An increase in total deal value in the past 12 months, ending in May 2011, indicates a sustained M&A cycle, and as confidence continues to build, markets stabilize and businesses look toward growth, we expect the acceleration of the M&A market to continue into the second half," says Martyn Curragh, US transaction services leader with PwC.

US Activity to Rise Steadily

Stronger capital markets, more available financing for M&A and significant amounts of cash on corporate balance sheets - and in private equity coffers - are among the reasons cited by PwC for expecting US M&A activity to continue to pick up steadily through the rest of this year. "Corporate buyers emerged from the downturn as the dominant force in the deal market, having stockpiled cash from restructuring and cutting costs during a period when growth opportunities were limited," Curragh says. "At the same time, competition for quality assets is helping push up valuations and average deal value."

The available cash on the balance sheets of Standard & Poor's 500 companies exceeds $1.1 trillion, according to Connecticut-based Factset Research System. According to PwC, corporations are continuing to use their strong cash positions and stock prices as currency to make acquisitions. Corporations have been the key players in larger deals, as they have sought to increase economies of scale.

More $1 Billion-Plus Deals

There were 73 deals in the US valued at more than $1 billion each in the first five months of 2011, totaling $331 billion, or 73% of total deal value, according to PwC. In the same period a year earlier, there were 60 such deals totaling $225 billion.

"As confidence returns and banks' appetite for lending around bigger deals begins to tick up, we expect deal size will continue to increase over the next 12 months," Curragh says.

The number of outbound deals is increasing due to high growth expectations in emerging markets, he says.There were 349 outbound deals in the US in the January-May period of this year, totaling $84 bilHon, compared with 334 deals in the same period a year earHer, totahng $46 bilHon. "We are seeing companies get more aggressive in pursuing outbound transactions, and there is a potential for these deals to get larger in value," Curragh says.

Strong Yen Spurs Buying

Meanwhile, companies based in Japan are taking advantage of the strong yen, as well as cash stockpiles, to acquire companies overseas.The global expansion of Japanese companies has accelerated since the March 11 earthquake, one of the largest ever recorded, which heightened concerns about diversification of supply chains.

Takeda Pharmaceutical agreed on May 19 to acquire Switzerland-based Nycomed International Management in a deal valued at $13.7 billion. The transaction is the second largest foreign acquisition by a Japanese company ever, according to Dealogic.The biggest was Japan Tobacco's purchase of UK-based Gallaher Group for $14.7 bilHon in 2006.

Takeda, which will dip into its cash reserves to fund the Nycomed purchase, is seeking to expand in China and other emerging markets, where Nycomed has a stronger market presence. …

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