Cash piles won’t drive more M&A

Apr 03, 2012
<p>Report from Moody's says the ratings agency expects spending on acquisitions to be 'modestly lower' this year</p>

When companies grow big cash piles, they often get itchy fingers: leaving lots of money lying around can look like bad capital management. And even if the company doesn’t seem to mind, shareholders probably will.

That’s why big cash accounts are seen as a boon for M&A. Companies feel they should do something with the money and expanding into new markets or consolidating with rivals is far more exciting than simply giving the stuff back to shareholders.

As a result, you might expect a buying spree now that cash levels are at record highs: a recent report from Moody’s Investors Service puts the amount held by non-financial US firms at $1.24 tn at the end of 2011, up from the previous record of $1.2 tn at the close of the previous year.

But Moody’s doesn’t expect an M&A bonanza. While corporate cash levels will help sustain deal making over the course of 2012, the ratings agency actually expects a slight decrease on last year’s overall activity.

‘With the tepid economic outlook and macro fragility stemming from sovereign financial stress and fiscal austerity measures, we believe aggregate spending in 2012 on share buybacks and acquisitions could be modestly lower, at around $400 bn,’ it writes in the report.

For those that do decide to buy, targets based abroad are looking relatively tempting compared with those in the US. That’s because the majority of the cash held by non-financial companies sits in accounts overseas – 57 percent of it, according to Moody’s.

US firms are making more and more of their money in emerging markets but would suffer a big tax hit if that money was repatriated, so earnings overseas sit there and accrue, while cash at home is eaten up by dividends and buybacks.

Investors and analysts want to see that cash put to use, so expensive acquisitions are easier to stomach if the seller is based abroad. That’s exactly what happened with Microsoft’s $8.5 bn purchase of Skype last year.

Skype is headquartered in Luxembourg, which allowed Microsoft to use up a chunk of its $40 bn-odd overseas holdings. At the time, Collins Stewart analyst Kevin Buttigieg said the deal uses ‘international cash balances, which MSFT otherwise couldn’t leverage without a large tax hit’.

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