Corporate Strategics and the $2 Trillion Dilemma

By Generational Equity


Although the article on Bloomberg focused on examples of large U.S. corporations putting their hoards of cash in play via acquisitions, the implications are very clear: If you own a privately held company and are interested in finding a buyer, the competition between corporate strategics and equity firms to make acquisitions has never been stronger.

Entitled “Corporations From GE to Apple Putting $2 Trillion to Work,” author Richard Clough does a good job of tracking the phenomenon of the past several years, post-recession, and the trend by corporations to hoard cash, waiting for economic trends to improve. As we have discussed, there are really only a few options available to CEOs and CFOs who are sitting on this $2 trillion pile of cash. One of the uses historically has been to acquire other companies under the assumption that buying is cheaper than building in most cases.

According to Bloomberg's Clough:

“Signs that the U.S. is rebounding from a winter slowdown and Europe is recovering from its recession are also beginning to encourage companies to pursue acquisitions.”

Although dividend payouts and stock buybacks are nice for investors in the short run; for many, the true value of their investment rises as the business expands and grows either organically – which has been quite slow post-recession with the economy expanding at 1-2% most quarters – or through acquisitions. More and more investors are aggressively encouraging their boards to look for strategic growth initiatives via the second option.

And they need to do something soon because, according to Bloomberg, the cash hoard only continues to grow despite buybacks and dividends:

“The cash pile reached $2.02 trillion in the latest quarterly filings of 2,300 non-financial companies in the Russell 3000 Index, according to the data compiled by Bloomberg as of April 21. The total rose about 13 percent from a year earlier in each of the two latest quarters, the fastest six-month gain since mid-2011. For comparison, Russia’s annual gross domestic product was about $2.01 trillion last year.”

Wow, is that a dose of reality. The cash pile on hand with 2,300 non-financial companies is LARGER than the entire Russian economy in 2013! Let that soak in for a moment. No wonder shareholders are getting antsy and want actions taken to use these funds wisely for growth.

Strategics and the Lower Middle-Market

Now analysts also point out that a good portion of these funds are being held by a relatively small number of very large corporations. And they are right technically, but even if you subtract out the $150 billion that is Apple’s share, you still come up with a huge stockpile of cash available.

And as we learned last week, more large corporate strategics are moving into the lower middle-market to make synergistic acquisitions of much smaller companies. In the case we looked at a few days ago, Lockheed Martin bought a company that was so small, in their SEC filings, it was listed as being “not material” to the overall operations of the company. As I mentioned, it may not have been material to Lockheed Martin, but I am sure it was to the owners of the acquired company.

The key takeaway here is this: Hoards of cash and lots of buyer competition equal what many are calling a seller’s market. This is great news for owners of privately held companies, especially those of you who have been putting off the sale of your company post-Great Recession. Now may be the time to act.

Are you unsure of your plans but are really interested in learning more? I have great news for you; Generational Equity is one of the leading sources of M&A information for the lower middle-market. Our seminars are packed with business owners just like you that want to learn about opportunities to find an optimal buyer in this investment environment. If you own a company generating less than $100 million in revenue, then you may be a great candidate to attend. 

No matter what, do yourself a favor and learn as much as you can about the next seller’s market and how you can benefit from it. Remember that knowledge is power and the fact is you will eventually exit your business – ‘tis far better to do so via good planning than letting circumstances force your hand.