I closed my review of the 2012 prospects for mergers and acquisitions with this paragraph: “Let’s hope the boom in M&A business does take place. Let’s hope that the corporate cash and corporate borrowing do not go just to corporations buying back their own stock. Let’s hope that the unwinding and restructuring takes place because that is one prerequisite for business to get back to the capital investment activities that do drive economic growth.”
However, at the end of January we see the headlines: “M&A volumes at lowest for a decade.”
“Dealmaking has had its slowest start to a year for nearly a decade, as companies’ appetite for mergers and acquisitions remains suppressed by the uncertain outlook for the global economy.”
The deal volumes announced so far this year…about half the level of 2011 at this time according to S&P Capital IQ.
Additionally, we read “Hordes of hoarders,” concerning corporate cash hordes "…with corporate entities holding onto well over $1.7 trillion at last count...At present, cash accounts for more than 6 percent of US non-financial companies.”
In one specific case, Apple (AAPL) has almost $100 billion in cash on its balance sheet, about level with the market value of companies like McDonald's (MCD), ConocoPhillips (COP), or Cisco Systems (CSCO).
This pales against the cash holdings of U.S. commercial banks, which in January 2012 hold almost 13 percent of their assets in cash balances, up from 9.3 percent at the end of 2010.
I know that this is early in the year, but with everyone looking for positive signs that the economy is picking up steam we need to consider other signs as well. Furthermore, the current situation is not unlike the situation that existed at the start of last year, and the actual commitments never really came about.
The one word that seems to be on almost everyone’s lips concerning this situation is uncertainty. There is just so much uncertainty that exists in the world right now that people are unwilling to commit substantial resources to acquisitions or capital investments.
Where is this uncertainty coming from?
In my mind this uncertainty exists from the lack of economic leadership in the world today. Europe continues to dither and so does the U.K., and so does the U.S. No one seems to know where they are going or where we are going.
How can anyone commit in such an environment?
Who knows what economic policies are going to prevail in these areas over the next year or two, let alone the next three months?
Who knows how the people in these areas are going to react to whatever economic policies are going to be enacted by their governments?
We’ve seen how the governments have acted in the recent past and these examples cannot give anyone much confidence.
Right now, I am concentrating on factors such as these to try and understand the state of the economy. Business leaders may be prepared to commit in the future and certainly they have the means to borrow additional funds if they need them.
These leaders still face the following question: “Why should I commit to buy another company now when the economy could get worse and I could buy the same company for a lower price at some time in the near future?”
Right now, the probability of this happening is still apparently large enough that it is causing these business leaders to hesitate to commit on acquisitions or capital investment.
I keep asking people to name one person in a position of political authority in the world that they would apply the title “leader” to, and I keep coming up with silence.
Unfortunately, I don’t believe that business leaders are going to commit resources until some sort of political leadership is forthcoming. I still believe that we can look at how corporations are using their “cash” as an indicator of future economic performance.
For right now, though, the “cash” stays on the balance sheets!