To quote the headline in today’s Wall Street Journal, (subscription may be required), With Fistfuls of Cash, Firms on the Hunt, it seems that we really are near the end of the recession, since this is the best time to CEOs to prepare their businesses for the post-recession recovery (that may be in swing as we speak). It’s when coffers are fullest, weak companies are weakest and when stock prices are undervalued so buying assets to kickstart an investor rush into your stock may be a sound strategy.

According to Jeffrey McCracken and Tom McGinty, the S&P 500 that are non-financial firms (382) are holding nearly a trillion dollars in cash and short-term investments. Thomson Reuters say that nearly 50% of deals so far in 2010 have been all cash.

Why the rush to buy assets?

  • Cash on deposit generates next to zero interest.
  • Shareholders are pressuring management to activate the cash since sitting on a pile of low interest-earning cash merely insulates bad management.
  • Share buybacks tell investors that management doesn’t know what else to do with the cash, meaning its time to change management.
  • Stocks are considered undervalued right now (S&P is off 29% from its high in 2007) meaning that cash is the more plentiful source of value.
  • Cash on the balance sheet, with poor performing management becomes a target for activist acquirers such as Elliott’s offer for Novell. Novell has $1 billion on the balance sheet which could be used to fund the acquisition.
And what is most interesting to me is that a third of that trillion dollars is held by companies in the information technology sector. We definitely should be in for more consolidation in our industry.

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