A couple of people have (independently) asked me recently
whether or not I thought the recent build-up in cash on corporate balance sheets suggested that
a new merger wave is around the corner? Sadly, I think not.
We've had a number of "merger waves" in our
history - late 1890s, the 1920s, the 1960s, the 1980s, and the more recent
credit bubble wave. In all these waves of merger activity, businesses
were riding stock market booms, credit was cheap, and boats were rising for
everyone. A rising economy can cover a lot of sins so why in those
circumstances shouldn't a manager seek to expand through an acquisition.
But what's happening now is fundamentally different.
Firms are hoarding cash because they're still scared.
It wasn't all that long ago that managers woke up to the realization that
the lines of credit they used to fund payroll might not always be there.
That's a scary thought. Even scarier, Europe has been teetering on
the edge of economic collapse for months with no end in sight. Add to
that an environmental catastrophe in the Gulf of Mexico that appears to have no
end. In response, firms have been rightly putting away cash (BW 2009 on this question) Times are definitely
Now, that doesn't mean that all that cash isn't burning a
hole in someone's pocket and that we're not going to see opportunistic add-ons
or consolidations. Of course, that's going to happen. There are
always going to be those - like Andrew Carnegie - consolidate when targets are
in distress. Though with acceptance of takeover defenses, the hostile
tender offer and the market for corporate control are not quite what they used
So while there will continue to be acquisition activity,
what's not going to happen is that the "party" is not going to get
started again anytime soon. Acquisition activity of that type tends to
ride on the coat-tails of other good economic news. With a paucity of good news
out there right now [registration/subscription required], there's no reason
to think that acquisition activity will lead us out.
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