The summer heat wave of acquisitions has fuelled much speculation about whether there's more to come - and if so, where in the market the participants will emerge. For Pierre Lapointe, the answer is pretty simple: Follow the cash.
In a research note this week, the Brockhouse Cooper global macro strategist, along with his economist colleague Alex Bellefleur, argued that conditions are excellent for would-be buyers to raise money for takeovers in the corporate bond market. Demand for high-yield corporate bonds is on a record pace this year, as the low interest-rate environment has made investors hungry for the better returns they offer.
But more important, they argue, is the mountain of cash in corporate coffers, after the financial crisis spurred companies worldwide to tighten their belts and clean up their balance sheets. On average, cash and "near-cash" short-term instruments now account for about 10 per cent of total assets for S&P 500 companies, almost two percentage points higher than the norm during the last economic expansion. Worldwide, the figure is a bit lower at 8.7 per cent, but that's still well above historical norms.
"Shareholders will not accept that companies hoard money. Investors can do that on their own. The objective of a company is to grow," they said. "Acquiring companies is one of the options that companies now have to redeploy the excess liquidity."
And where you find the most excess liquidity, they argued, is where you're most likely to find companies in the market for acquisitions.
FAT U.S. WALLETS, SHALLOW CANADIAN POCKETS
Regionally, Greece currently enjoys the highest proportion of cash to total assets on corporate balance sheets - although maybe "enjoy" isn't the right word. The Greek market remains overcast by the country's debt crisis, so companies are likely to cling to that cash for defensive reasons, they said. Ditto Ireland, with the third-highest cash-to-assets ratio.
But healthier areas with elevated cash ratios - such as Taiwan, Hong Kong, the United States and China - "are the countries where acquirers are most likely to originate."
On the flip side, the countries with the lowest cash levels "are less likely to embark on a shopping spree," they said. This list includes Canada - its cash-to-assets ratio of 5.2 per cent is barely half the U.S. level.
TECH TAKEOVERS TO COME?
Mr. Lapointe and Mr. Bellefleur noted that every major industry sector has cash levels above their historical norms. Information technology companies, which have already been active in this summer's M&A wave, are the most flush with cash, followed by health care and consumer discretionary.
"The M&A revival is poised to continue to be led by [information technology]companies, as they have the most cash on hand. In our opinion, U.S., Chinese and Taiwanese companies could be among the most active acquirers," they concluded.