Commentaries

Where cash is not yet king

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.

Cazenove’s yield may muddy JP Morgan deal

As your friendly neighbourhood investment bank rarely tells you, something like 80 percent of deals don’t pay off. So why do one if you don’t have to?

That is the question facing the mighty City of London firm of Cazenove. Five years after Caz poured its investment banking business into a joint venture with the U.S. bank, JP Morgan <JPM.N>, it has to decide whether to go the whole hog and sell the remainder — or to hang on.

Technically the shares are the subject of a put and call arrangement — JP Morgan can force Caz’s investors to sell and vice versa. But it is hard to imagine the Americans obliging the shareholders to sell if they clearly don’t want to.

Which raises the question: why would they want to?

A deal has certain attractions for JP Morgan. The bank’s UK business would be simpler if it owned 100 percent of its UK investment banking operations. The current set-up is quite advantageous for Caz. Not least it gives it access to JP Morgan’s deep pockets and client list.

But these are also good reasons for Caz shareholders to hang on. Most commentators have focused on the cultural reasons for leaving the joint venture intact and these are indeed potent. But there are also good financial reasons to leave things where they are. Take the fact that the joint venture perches on JP Morgan’s mega balance sheet. This gives it the best of both worlds. It can use the U.S. bank’s financial heft to haul in equity capital markets business but it doesn’t carry the risk. Any duff underwritings land on JP Morgan’s plate.

This means the JV hardly needs any capital. Caz itself is a shell these days — its only asset is its near 50 percent stake in the joint venture. That in turn means almost all its profits are flushed through as dividends. Caz’s share of the joint venture’s after-tax profit last year was 46 million pounds, all of which was paid to its own shareholders (plus a further 3 million generated by Caz itself).

True confessions

Journalists are suckers for a confessional story.

There’s belief among journalists that confessional stories carry more resonance with readers because they often are narrative tales about insiders fessing-up to the truth.

And so today we have Andrew Ross Sorkin in The New York Times telling us the great confession of British private equity chieftain Guy Hands. What’s Hands’s great admission? That private equity firms charge excessive fees to investors and that highly-leveraged takeover artists aren’t always the great managers they purport to be.

Shocking, right? Critics of private equity have been saying those same things for years.

So why does it matter that Hands wants to spill his guts to Sorkin over tea at the Jumeriah Essex House, a fancy hotel overlooking New York’s Central Park? To be blunt, it doesn’t.

This true confession might seem a bit more sincere if Hands also announced he was rebating to investors some of the management fees his firm had collected over the years. Or, better yet, he helped find work for some of the people who lost jobs at the now debt-laden companies his firm has acquired.

Oh, and one more thing Hands: what about moving out of the island of Guernsey so you can start paying your fair share of taxes to the British government.

July: It rained, the deals didn’t

With stock markets on the rise and some signs of economies steadying, if not recovering, investment bankers have recently sounded more optimistic about the prospect for deal-making for the second half of the year.

This month? Not so good.

July, with just $96 billion in announced deals around the globe, is the first month to have less than $100 billion in worldwide M&A since September 2004, reports Thomson Reuters Deal Intelligence. No deal was more than $5 billion, the first time that has happened in a month in nearly six years. (The biggest announced merger was in Japan, the $4.4 billion acquisition of Nipponkoa Insurance by Sompo Japan Insurance. The biggest U.S. acquisition was Sanofi-Aventis’ $4 billion offer for Merial.)

This August – especially after two consecutive summers of financial crisis – is certain to be slow as well as Wall Street and other financial centers go on vacation. Any pickup in M&A activity in the second half will have to start with a flurry in September.

For the entire first half, worldwide M&A totaled $1.1 trillion, a decline of 43 percent from the same period in 2008. More details from the Thomson Reuters data can be found in this post on DealZone.