M&A: A Reason to Get Off Your Cash

One of the reasons tech companies used to hoard cash was for prospective mergers and acquisitions — a trend that market research firm Ernst & Young Global Ltd. says is picking up. (See Unknown Document 20030 .)

M&A among technology companies in the third quarter of 2010 climbed 43 percent over the comparable prior-year period. A couple of interesting things E&Y notes in its most recent report: First, companies are sitting on bundles of cash that could be used for acquisition. Second, offshore bundles of cash are a hindrance for companies that may want to buy businesses in the US. (See Cash Hoarders & the Confidence Crisis.)

Technology firms are well positioned to execute further transactions, according to Joe Steger, Global Technology Transaction Advisory Services Leader at Ernst & Young. “Leading technology companies have good financial flexibility, owing to significant cash balances and little leverage; however, many US technology companies have significant amounts of cash 'trapped' offshore, which limits the amount of cash available for US acquisitions.” It also limits the tax base available to the US. (See More on Cash Hoarding & the Confidence Crisis.)

But companies are spending more money on their acquisitions. Total deal value in the third quarter 2010 increased by 48 percent compared to the same period last year, and 50 percent over the previous quarter to $46.2 billion. In addition, 11 deals over $1 billion were announced in the quarter, bringing the year-to-date number of big-ticket deals to 20, one more than in all of last year and six more than in all of 2008.

Companies are no longer waiting to secure deals they consider strategic: In the third quarter most of the activity was in initiatives such as e-commerce, cloud computing, social networking, online gaming, wireless telecommunications, and mobile security. “Growing demand for connectivity and real-time access to actionable [sic] information over mobile devices is transforming the sector and propelling the globalization and convergence of technology platforms with other industries, spurring deal activity,” says Steger.

Half the number of deals in the quarter were cross-border, says E&Y. “After a pause in the first quarter of 2010, cross-border technology deals have significantly outpaced domestic deal growth for the past two quarters. Following a strong rebound in the second quarter of 2010, cross-border deal numbers surged in 3Q10, accounting for 51 percent ($23.5 billion) of total deal value.”

E&Y expects the key trends driving M&A to continue. There are a few things that could hinder future activity, though. First is companies' reluctance to part ways with their cash. The second, says E&Y, is a continued downturn in global economic confidence could dampen the short-term outlook.

Would you rather see tech companies spend their cash on cross-border deals, or sit on their money until they are willing to spend it onshore?

5 comments on “M&A: A Reason to Get Off Your Cash

  1. Backorder
    November 10, 2010

    Interesting post. I believe, hesitant companies are likely to wait and watch still, however, there are aggressive companies, mostly leaders, who are willing to spend when the chips are down so they can be ahead of everyone when things become positive. The strategy is basically to be ahead of the industry curve. But, I find the idea of “cash being trapped offshore” very intriguing and havent really seen any figures on it yet. Would be interesting to know who all are limited this way.

  2. Barbara Jorgensen
    November 10, 2010

    Interesting you should say that. Today's WSJ has a great article on how sitting on loads of cash is hurting Nintendo. Their currency-hedging process apparently includes carrying a lot of non-yen currency and Nintendo took a hammering this quarter. It isn't quite M&A, but it is relevant to the issue of companies sitting on cash and some of the pros and cons of this strategy.

    Here's the link:

  3. AnalyzeThis
    November 10, 2010

    Right, that Nintendo situation is a good example, actually.

    I'm personally somewhat surprised that there hasn't been more M&A activity. I think some companies were perhaps hoping the economy would get even worse, and they'd be able to snatch up some of their heavily damaged competitors at bargain prices. Obviously that has not happened.

    I do think that the next six months will see at least a slight burst in M&A activity, however. Although I would be shocked if the discussed AOL/Yahoo merger goes through.

  4. elctrnx_lyf
    November 11, 2010

    It is almost happening everywhere across the electronics sector such as semiconductors, electronic products and ifnormation technology companies. There is been lot of demand for newer technologies and many governments planning to transform into e-passport, internet governance along with lot of invetment in energy is fuelling a huge growth. Even the semiconductor market is seeing lot of acquisitions this year by likes of intel, broadcom etc.

  5. Barbara Jorgensen
    November 15, 2010

    I just wanted to update readers: The Belden acqusiition of T&B's division was paid for–all $78 million of it–in cash.

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