Can Corporate Cash Save U.S. Stock Market?

by: Investment U

By Marc Lichtenfeld

Scan the headlines these days and a lengthy list of negatives will stare you in the face.Stubbornly high numbers of unemployed Americans. The gargantuan (and ever-increasing) budget deficit. And just yesterday, news that existing home sales recorded a bone-jarring 27% plunge in July, twice as much as forecast. Things are just plain awful, aren’t they?

Well, not everything. Despite the many negatives, there are some positives (just don’t hold your breath for the media to tell you about them.)

For example, non-financial S&P 500 companies have $837 billion in cash on their balance sheets. That’s a record and is up 26% from a year ago. (My colleague Louis Basenese recently quoted a figure from Moody’s, which claims non-financial companies as a whole are sitting on $1.84 trillion in cash.) Those bazookas full of cash have been locked and loaded for a while. And now it looks like some companies are beginning to fire away. Here are their targets…

Big Money… Big Acquisitions

Several big-money acquisitions have already hit the headlines recently:

  • Hewlett Packard (NYSE:HPQ): On Monday, the company bid $1.6 billion in cash ($24 per share) for storage systems provider 3PAR (NYSE:PAR). That’s higher than the $1.15 billion, also in cash, that Dell (DELL) offered last week.
  • BHP Billiton (NYSE:BHP): The company threw a $40 billion cash offer ($130 per share) at Potash Corporation of Saskatchewan (POT). But Potash rejected it, as more lucrative offers are expected.
  • Sanofi-Aventis (NYSE:SNY): It’s expected to offer somewhere in the neighborhood of $18.4 billion or $69 per share for Genzyme (GENZ). At least one analyst believes the deal will go through at $76 to $79 per share, or even more if another suitor emerges.

And on Monday, Fujitsu (OTCPK:FJTSY), Japan’s largest computer manufacturer said it’s actively looking for acquisitions to spur its global growth plan. Fujitsu is sitting on approximately $4.8 billion in cash.

And it’s not just corporations gobbling up competitors in order to achieve growth…

Hedge Funds Flash the Cash

As Louis mentioned last week, hedge funds really need to start flashing their enormous wads of cash, in order to justify their management and performance fees. And several of them have recently made offers to acquire companies.

  • For example, Cereberus Capital Management is in the process of buying BlueLinx Holdings (NYSE:BXC) for $3.40 per share in cash. When the deal was announced, BXC shares were trading at $2.50 and some shareholders are opposing the acquisition, claiming BlueLinx is worth substantially more than $3.40.
  • In addition, Ramius Capital is trying to buy Cypress Bioscience (CYPB). Cypress was also trading at $2.50 when it received a $4 per share offer from Ramius Capital. Cypress’ management is trying to fight the takeover attempt.

A word of caution, though: You never want to buy a stock for the sole reason that you think the company will be bought.

Three Steps for M&A Success

But by following the guidelines below, you can increase your chances of owning a stock that will get acquired or that will still be a winner if it doesn’t receive a buyout offer.

  1. Profitable: It’s much easier to sell a deal to shareholders when the company being acquired will add to earnings.
  2. Strong Growth Prospects: Growth is the main reason why companies buy other companies.
  3. Strong Balance Sheet: Many buyers won’t want to take on a huge amount of debt in the present environment.

Keep in mind that these guidelines don’t apply in the small cap healthcare space, where most companies aren’t profitable, nor have great balance sheets. In those cases, buyers are attracted to a promising pipeline of new drugs.

All told, US businesses are sitting on about $3 trillion in cash, according to Dr. Mark Dotzour at Texas A&M University. With so much of it earning little to no interest, we’ll likely see an avalanche of money thrown at companies that have something to offer. And this has the potential to prop up the market as well as create some excellent gains for investors who are in the right stocks.

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