Flush with Cash, Companies Are Looking to Mergers and Acquisitions

By and large, US large-cap companies are sitting on some sizeable war chests. That is positive for investors, because it speaks for balance sheet strength and financial flexibility.

Now that the global economy is showing signs of a return to normal, many solvent corporations are pondering plans for this capital. Yes, buybacks are back in some industries and dividend growth is skyrocketing, but many companies are looking for other ways to spend money, including mergers and acquisitions. Indeed, some market watchers see increasing consolidation as an emerging broader market catalyst.

“The next driver of equity demand is likely to come from mergers and acquisitions (M&A). Corporate leaders reacted like a stag in the spotlight to the pandemic last year, choosing to hold capital and do little acquisition and repurchase activity, ”said Mark Hackett of Nationwide. “As the environment has improved, companies’ cash on hand has increased. Companies now hold over 6.3% of their assets in cash – two thirds more than the long-term average of 3.8% – and generate practically no returns. We have already seen a wave of takeover announcements that create the conditions for record deals in the coming quarters. “

Hackett does not identify any specific industries in which there could be increased consolidation activity. However, many analysts are already discussing the prospect of increased biotech takeover activity in the second half of the year.

There has also been a rapid pace of mergers and acquisitions in the banking sector this year as the continued sluggish deposit and credit growth makes consolidation all the more attractive.

With oil prices recovering and energy companies on a more solid financial footing than they were in 2020, there are some signs of consolidation in this industry as well. However, regardless of where M&A activity picks up, investors should remember to see the forest through the trees.

“Significant M&A activity can often be seen in the later stages of a market run, making it very difficult to sell short stocks and contributing to above-average returns in certain stock sectors,” added Hackett. “In extreme cases, however, this could indicate that companies are struggling to drive organic growth and are willing to take increased risks in order to generate profits. If so, it would signal that the market rally has been extended. “

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