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Waiting to Spend Like a Sailor on Leave

Posted by: Howard Silverblatt on March 28, 2011

Recently, Warren Buffett stated that his “trigger finger is itchy” to make acquisitions, then he pulled the trigger with a US$ 9 billion cash offer for S&P MidCap 400 specialty chemical maker, Lubrizol Corp (LZ), which gained 27.7% for the day. AT&T decided that a quick way to improve its cell lines was through a US$ 39 billion acquisition of T-Mobile from Deutsche Telecom, of which $25 billion is in cash; Deutsche closed up 11% that day (and may end up holding 8% of AT&T in the deal). And eBay just announced a US$ 2.4 billion cash offer for GSI Commerce (the issue closed at $19.38, hasn’t opened yet, and the offer is for $29.25). It would appear to me that S&P 500 companies are equally as ‘itchy’, not just for M&A, but to spend, and spend big, since they’ve been on spending diet for over two-year. Spend on CapX, spend on R&D, spend on buybacks, and even spend on dividends; note I didn’t say spend on hiring. So what’s holding them back, I believe, is concern over the economy, and the fact that things, specifically earnings and cash-flow, are doing so well - why take the chance? Cash, shock and dismay, has set a ninth consecutive quarterly record, and now stands at 10% of market value. Preliminary cash-flow numbers for 2010 may set a record high, and are 125% of expected 2011 operating income, and exceed 2010 dividends, buybacks, and CapX combined. Market-to-cash flow is now at 10, and with low interest rates, discounted cash-flow models are showing a lot of attractive issues.

So far this year, six breakups within the S&P 500 have been announced, which, when combined with the one executed, and the one scheduled from last year, puts the 2011 spin-off count higher than the historical average of less than seven a year, and it’s still Q1. These spinoffs were not a spur-of-the-moment item, nor were Mr. Buffett’s acquisition, or the Ma Bell buildup, or eBay’s bid. They have been talked about, studied, and planned for years, with the only open decision being “when, and for how much.” Given the events in Japan and in the Middle East, the” when” may not be today for many, but soon, and, when it comes, it will be big. All that built-up planning, combined with significant cash and common shares sitting in treasury accounts from the buyback bonanza, and the desire to grow quickly, translates into M&A activity.

So how long can companies sit on their massive assets, nervous about the market? Not that they aren’t justified in being nervous, but they can’t keep building cash reserves, content with past cost-cutting to support future growth. All those companies, with all that money, all coming from the same B school, all using the same charts, and all deciding to spend it at the same time - do I need to be a supply-sider to know what that will do initially to stock prices. This is America, and for Corporate America, its build it or leave it. Can Monday Morning Merger Mania be far off?

Reader Comments

d brydone

March 30, 2011 12:11 PM

regarding my earlier email, I meant to say we don't need less corporate tax, as there is obviously enough money for investment from your article, which is the whole point of lower tax. We need more corporate tax so it can be transferred ot ordinary people to keep ordinary people buying the stuff they make. I wonder if all big companies are like GE, where they pay NO tax. Apparently when a government is in tandem with the corporate side of a country and manage affairs to suit them, that is a definition of fascism. That's a wod that says a lot doesn't it, it sound almost as bad as 'tax'

Prince Ray

April 2, 2011 7:13 PM

The Big Question: Why is corporate America still showing their greed?. And rather than, having continued hind-sight and merely gobbling up other companies thus, cutting down competition even more, start the hiring thus, spuring spending within the masses and getting the economy going!. In all the business news, I don't hear corporate America stating, "Hey let's do our part to get the economy going, and spur growth in the employment" No, there's the unspoken, "What's in it for me".

B Wilds

April 3, 2011 11:57 AM

Comments from Warren Buffett give me no comfort. Before long he will have his own bedroom at the White House.

I on the other hand live on the corner of Main and Nowhere. It appears to me that the economy is stuck in Nowhere!


April 6, 2011 4:27 PM

One way or the other, corporate taxes are simply passed on to the consumer.


May 15, 2011 7:48 AM

Only a matter of time before the next 'tech boom' which will be of course a precursor to the bust. Still it will shake a few more leaves loose and allow the Google's and Microsofts to pick the cherries and make themselves more bigger and powerful than you would beleive (not to mention Facebook of course. It is the old industrial revolution model repeating itself again.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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