Corporations Put Excess Cash to Work in Global M&A Market

Cash-funded merger and acquisition deals are on the rise as global corporations look to distribute some of the excess cash on their balance sheets. According to new M&A research, cash transactions make up 68% of all current deal volume – the highest level it has been since 2008 and well above the ten year average of 61%.

Slowed M&A activity over the past few years has left many corporations with record levels of accumulated cash. In 2011, research findings from Factset Research System estimated this figure to be at $1.1 trillion amongst S&P 500 companies. The preference for cash-driven deals may also be, in part, due to the market volatility in equity valuations, which has left many buyers unwilling to deploy their own equity as a means of financing deals. Cash-based transactions limit the possibility that additional equity might need to be issued in the event that a buyer’s stock price declines post-announcement.

Corporations worldwide are not just deploying their cash stockpiles to drive deal volume, but also using their cash to make high value acquisitions. In the last couple of months alone, numerous high-value cash deals were announced. In April, private equity firm Veritas Capital agreed to buy Thomson Reuters Corp’s healthcare business for $1.25 billion in cash. In May, SAP AG announced an all-cash deal with Ariba Inc for about $4.5 billion, and Agilent Technologies Inc agreed to buy Dako for $2.2 billion. Last month also saw the second largest foreign acquisition ever made by a Japanese company, with Takeda Pharmaceutical dipping into its cash reserves and acquiring Nycomed International Management in a deal valued at $13.7 billion.

Interesting insights from Citigroup reveal that transformational deals financed with cash significantly outperform those financed with a substantial portion of equity. In cash-only deals, the excess return for the acquirer was 14.3% after one year and 23.1% after two years. In contrast, the excess return in stock-only deals was just 2.5% after one year and 2.9% after two. In addition, deals which had a mixture of both cash and stocks, in which equity formed the majority of the value, tended to be value destructive for the acquirer over the same time period.

As market conditions improve, corporations will continue to deploy their cash reserves to make acquisitions. Sell-side companies looking to capitalize on this trend need to be prepared to go to market and should consider setting up a virtual data room. Don’t let time kill the deal. Upload and organize all your confidential documents ahead of time and be ready for the due diligence process. Learn more about how Firmex can facilitate sell-side deals.

Debbie Stephenson

Debbie Stephenson is a former Content Marketing Manager at Firmex.