Where cash is not yet king

September 28, 2009

In deal-making, the appeal of cash is obvious. Cash offers a cleaner exit for investors, particularly foreign ones. It has a value that will not fluctuate the way that stock prices can between when a deal is announced and when it closes.

For companies sitting on large piles of cash, using some of the money for deals makes sense given the low-yielding alternatives.

And a number of American acquirers are stumping up and putting cash on the barrel. Abbott Laboratories said today that it would spend 4.5 billion euros in cash ($6.6 billion) in cash for the drug unit of Solvay of Belgium. Last week, Dell announced that it would spend $3.9 billion in cash for Perot Systems. (Abbott will be left with more than $2 billion in cash on its balance sheet, while Dell will have $9 billion.)

Yet cash accounts for a smaller slice of the M&A universe than it did pre-financial crisis. Cash-only deals by American acquirers account for only 20.3 percent of total merger volume so far this year, according to Thomson Reuters data. That’s 803 transactions representing $93 billion worth of deals. Compared that all of 2007, when 1,919 all-cash transactions accounted for 54.5 percent of total dollar deal volume in the United States – or $796 billion worth of deals.

Worldwide, the story is similar. All-cash deals represented just 27.4 percent, or $394 billion, of total M&A, compared with 45.8 percent, or $1.5 trillion worth of total M&A, in the same period in 2007, according to Thomson Reuters data.

Of course, 2007 was –until that August — a year of gigantic buyouts by private-equity firms using borrowed cash. Leveraged buyouts on that scale are not going to return for some time, if they ever do.

Still, the use of cash in at least some recent prominent deals is an encouraging sign. It shows that companies are moving well past the paralysis caused by last year’s financial turmoil and recession and putting money to use in making strategic investments. Increased capital spending and hiring may not be far behind.

And if cash is used more in deals, that would be beneficial for equity investors as well. A 2006 study by McKinsey & Co. found that in all-cash deals, a much smaller percentage of acquirers overpay, compared with all-stock deals. The review of 1,000 global deals from 1997 to 2006 also found that all-cash deals receive a better response on the stock market for the first two days than all-stock deals do.

So c’mon corporate deal makers, show us the money!

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