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?