July 31, 2011
In the first half of 2011, the total value of M&A transactions in the United States rose 39% from the same period a year earlier, according to PwC. Average deal size grew 45%, reflecting an increasingly competitive environment for deals and improved business confidence among buyers. The M&A market is accelerating quickly, as the nose of the global economy begins to tip upward.
This increase in M&A activity has been accompanied by an increase in the number of deals exceeding $10B in transaction value. These mega-deals are being driven by multinationals with large stockpiles of cash on their balance sheets. Despite relatively robust equity markets, 50% of the largest M&A deals across all sectors this year have been transacted in cash.
The multinational aspect is key. At year-end 2010, US companies were holding more than $1.2 trillion in cash balances overseas, according to Moody’s research, an increase of more than 10% over year-end 2009. Global giants Apple Inc., Microsoft Corp., Cisco Systems Inc., Pfizer Inc., and Google Inc. held the largest amounts of cash outside the US.
* Curious note: while Google, Microsoft, and Cisco have consistently been among the top acquirers over the last five years in terms of numbers of acquisitions, Apple (whose $76 billion cash war chest is even greater than the U.S. government’s current operating balance of $74 billion) is not even in the Top 20 technology acquirers over the same period. I’ll explore the reasons and whom Apple should buy in a subsequent blog.
Why are US companies holding so much of their cash overseas?
If these companies repatriate the funds back to the US, they are subjected to a 35% repatriation tax. This helps to explain why Apple has not paid out any of its $76.2B cash pile in dividends to its shareholders. More than $47B (61%) of this cash is held outside of the US and would be subject to repatriation taxes if it were returned home. Add in dividend taxes, and more than 50% of Apple’s cash could be consumed by the IRS if delivered to shareholders — not a good use of their money.
Naturally, a significant chunk of this overseas cash is being plowed back into the soil from whence it came. As a percentage of all US-initiated transactions, the number of mega-deals for overseas companies being acquired by US companies has steadily risen throughout most of the last decade.
These barriers to repatriation contain a de facto inducement for the largest US firms, as they actively encourage global investment in places where earning a buck may be cheaper and easier than in the United States. Call it an implicit global stimulus package. Smaller firms, however, may have a tougher time competing in M&A abroad against these foreign-grown money-making machines. In this ripening investment market, is that a good thing?