Last year, global merger activity clocked in at a record-setting $4.83 trillion, thanks mostly to private equity firms with deep pockets.
It has even been argued that, for the past few years, the market's downside risk has been mitigated by a "private equity put." In other words, if stocks went down, private equity firms like Blackstone (NYSE: BX) would swoop in and buy the discounted companies.
But with easy credit tougher to come by, private equity may not be able to put the brakes on a market downturn.
Cash rules everything
Despite the reduced presence of private equity, there are still investors (specifically large multinational companies) who have the means to buy unfairly punished companies.
Indeed, 2008's top merger stories may be driven by large corporations with tons of cash on their balance sheets. What these companies choose to do with all that cash is a matter of debate, of course -- some could pay down existing debt or boost (or even begin) dividend payments to shareholders -- but the recent market downturn could also present tremendous buying opportunities for these kings of cash.
For proof of this trend, look no further than the newswire: On Jan. 16, Oracle (Nasdaq: ORCL) announced its purchase of rival BEA Systems (Nasdaq: BEAS) for $8.5 billion in cash. On Jan. 28, General Electric (NYSE: GE) purchased Tenaris' (NYSE: TS) pressure-control business for $1.12 billion.
Moreover, because of the strengthening of the euro in recent years, European multinationals may be in a particularly good position to go shopping in these sectors.
European pharmaceutical giants Novartis (NYSE: NVS) and AstraZeneca (NYSE: AZN), for example, have more than $5 billion and $7 billion, respectively, in cash and equivalents and could go looking for a few promising biotech firms to add to their bullpens.
Mattress stuffing
According to Capital IQ, there are 346 U.S.-listed companies that hold $1 billion or more in cash and equivalents in their war chests. That's a lot of cash for companies to have sitting around in a low-interest-rate environment -- it would make sense for them to find investments that provide a better return.
So what sort of companies are possible targets for takeover in 2008? According to a recent global M&A forecast from KPMG: "The winners in 2008 may include sectors such as education, information technology and consulting services, energy, and health care." It shouldn't come as a surprise that many of these sectors are traditionally counter-cyclical and might be appealing to would-be investors given current market conditions.
Unload your war chest
Even though the market has been down so far this year, that didn't stop Oracle or GE from spending cash on what they considered to be good values. And this current market shouldn't stop you from investing, either, as long as you:
- Buy great companies,
- Trading at reasonable valuations, and
- Hold them for the long term.
