The tech sector has $2 trillion in firepower to do deals - and now's the time to strike

Read full story

Tim CookApple CEO Tim Cook.Mike Blake/Reuters

  • Dealmaking is off to a hot start in 2018, and it could continue thanks to the huge amount of cash available to public companies for transactions.
  • Firepower for mergers and acquisitions has surged to more than $5 trillion in the past year, according to research by Citigroup. That's up from $3.3 trillion at the beginning of 2017. The large increase is partly attributable to the new tax law.
  • Citigroup says now's a great time to do deals. If companies sit on cash for too long, they could expose themselves to pressure from activists. And deals struck in volatile periods tend to outperform.

Aside from the roughly 10-day span when markets see-sawed violently and volatility ran amok, mergers and acquisitions have been off to a hot start in 2018.

Global mergers-and-acquisitions volume hit $449 billion through mid-February, up 21% from 2017, according to a client report by Citi's Financial Strategy and Solutions Group. Nearly half of that is from megadeals larger than $5 billion - such as the $18.7 billion Keurig-Dr. Pepper deal or Blackstone Group's $17 billion buyout of Thomson Reuters' financial data business.

Deals have been welcomed enthusiastically as well, giving the acquiring company a 3.6% one-day stock boost on average.

And thanks to an enormous cache of M&A firepower exceeding $5 trillion, dealmaking could continue to surge despite the recent bout of market turmoil, according to Citi.

Citi explains that M&A volume historically tracks with M&A firepower, and the bank estimates that firepower, which it defines as "the sum of a company's readily available cash and debt capacity within its credit rating" stands at $5 trillion to $5.5 trillion for the S&P 500, excluding financials and utilities companies. That's up from $3.3 trillion at the beginning of 2017.

The boatload of new cash is primarily attributable to the new tax law, and Citi says companies across all sectors will be impacted.

"Not all of this increase is due to multinational companies gaining unrestricted access to their foreign cash holdings," Citi said in the report. "Domestically focused companies will also see an increase in their debt capacity due to larger after-tax cash flows available to delever following an acquisition."

The technology sector has seen the largest increase, doubling from $1 trillion to $2 trillion in available dealmaking cash. Analysts across Wall Street have recently been making cases for various tech deals, with Barclays suggesting Apple should buy Dropbox, and Citigroup saying there's a 40% chance Apple will buy Netflix. Morgan Stanley meanwhile has identified tech companies FireEye and Conduent as potential takeover targets.

Citi chart on Dollar 5 trillion M&A firepowerCiti

The cash, of course, is not evenly distributed among companies. In tech, the Apples and Googles of the world have a disproportionate amount of firepower available to them.

So should we expect a rash of acquisitions from the FAANG stocks? On the one hand, excess firepower means increased competition for assets and potentially high-priced bidding wars - especially in consolidating sectors like healthcare. There's also the return of market volatility, which tends to dampen dealmaking.

On the other hand, conditions are still ripe in general for M&A, and the ever-growing presence of activists could force these companies' hands. While it may be temping to "simply accumulate cash," Citi says companies with large cash balances become prime targets for the likes of Nelson Peltz and Paul Singer.

Additionally, Citi notes that volatility actually doesn't mute returns over the long haul. In fact, the opposite is true, according to Citi's analysis: "The median deal announced in high-volatility periods delivered 9.4% two-year excess returns, compared to only 5.7% for deals announced in less volatile periods."

The take-home message to companies: What are you waiting for?

Add Comment()

Comments ()

Sort By:
Be the first one to comment.
We have sent you a verification email. This comment will be published once verification is done.