Get Ready for the M&A Boom
Yet as we head into the middle of 2012, the corporate playbook may soon change. Companies are now quite flush with cash, but a still-slow economy means further sales and profit gains may be elusive in coming quarters. Remember that top executives are rewarded with a slew of financial incentives to deliver rising sales and profits -- and a growing stock price.
To make that happen, a lot of these executives are now likely to be more susceptible to the pitch from investment bankers. That pitch: "Why not go out and buy yourself some growth through selected acquisitions?" Growth-through-acquisitions has been a proven strategy in past economic cycles, and this one is no different.
To be sure, with the exception of energy stocks, there hasn't been a whole lot of deal-making in the past few years. Not only did companies have ample opportunities to reap gains internally, but the broader economic backdrop was just too iffy. Nobody wants to do a major deal if the economy wobbles into recession. If that happened, the acquiring company could end up saddled with just one more headache to deal with.
But the economic picture in 2012 changes that view. The U.S. economy no longer appears at risk of slipping into recession, nor does it appear to be on the cusp of a robust upturn that can deliver solid internal growth. This "not too hot and not too cold" backdrop has always proven to be a key catalyst for a rising level of deal-making.
In fact, there's another factor that could turn this coming era of mergers and acquisitions into a boom like we've never seen. Though most companies might look to use their stock or cash to make deals, they're also well aware of the fact that interest rates have never been quite this low. Indeed, many cash-rich companies have gone out and sold bonds in recent quarters at very low rates -- simply because they can. As a result, they are sitting on gross cash levels that have never been so high.
And the cash-building continues. Consider that Fortune 500 companies issued $450 billion in in investment grade bonds 2011. In the first quarter of 2012, they issued another $310 billion, putting them on pace for more than $1 trillion in newly-issued bonds this year. Those aren't "rainy-day" funds but shopping-around money.