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Companies unloading cash on mergers

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Kai Ryssdal:I saw a tweet from our Friday regular Heidi Moore this morning that caught my eye. She was talking about a Thomson Reuters study she'd seen that showed there was $200 billion worth of corporate dealmaking done this month. $200 billion in mergers and acquisitions -- and it's August! As in, the month when there's usually nothing going on. In fact, this is the busiest August we've had in 11 years. Yesterday, as we told you, Intel said it was buying McAfee, the computer security company. This one doesn't count since it's not a done deal, but Tuesday BHP Billiton tried to take over a huge Canadian fertilizer company to the tune of $40 billion.

We asked Marketplace's Alisa Roth to find out why these companies are so darn hungry.


Alisa Roth: One reason companies want to do deals is interest rates are so low, financing them is cheap. But a lot of companies have saved so much money, they can pay cash. And it's cash they don't necessarily know what else to do with.

James Brock is a professor at Miami University in Ohio. He says buying other companies is an easy option.

James Brock: You know, what I think it offers, I think it offers is this kind of romantic illusion of fast growth.

Emphasis on illusion. He says historically most of these partnerships don't last -- think Daimler Chrysler, AOL and Time Warner. One question is why companies don't invest their savings in themselves -- hire more workers or build new plants.

Brad Hintz is an equity analyst at Sanford Bernstein. He says an acquisition -- if it's at the right price -- can be the better bargain.

Brad Hintz: When the stock market's valuation is low, it's actually cheaper to go out and buy whole companies and get their workers that way than it is to go out and hire workers and invest in new plant and equipment.

Maybe. But James Brock says there's also the potential for companies to get carried away.

Brock: They get all hot and excited, they've got lots of money. And they step up to the bar and unload their wallet and then the next morning is sort of regret.

And the more deals there are, the more potential there is for overpaying, since companies worry about losing out a deal to the competition.

In New York, I'm Alisa Roth for Marketplace.

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I run a mergers and acquisitions hedge fund and follow this market extremely closely. In addition to the points raised in your story about new deal flow, I would add that a huge chunk of capital (estimates are over half-a-billion) is sitting in the hands of Private Equity firms that have a mandate to buy other companies and turn them around before eventually spinning them back out as public companies. Notwithstanding a few notable small and mid-cap deals they have been conspicuously quiet this year relative to their capital base. A very important reason why we are not seeing an even greater flow of new deals - generated by either strategic buyers (i.e., United Airlines buying Continental) or financial buyers (i.e., Private Equity), is the ongoing uncertainty about the economy. The Conference Board has a CEO Confidence Index that comes out quarterly and in Q2 was flat quarter-over-quarter. It will be very interesting to see what the Q3 index reveals. Obviously the less confidence there is in the corner office about business conditions, the less likely the call will come down to buy up competitors or spend money to invest in the future and create jobs.

Feel free to contact me for more insight.

Now that companies are commiting to making the significant acquisitions, they face the other side of the coin: What do we do next? This article very nicely articulates that bringing the resources together to do the deal does not mean that the company has the capabilities at hand to leverage the new opportunities that come with the acquisition.

Some firms have developed some degree of the core set of acquisition capabilities but many will find that they are not prepared to move through the complex process of an effective integration, especially in a way that they can position themselves for the quantum leap gains that they may envision - and are possible in this unique window of opportunity. It will be very interesting, for example to see if HP or Dell has the wherewithall to make the most of its run on 3PAR. The emphasis on cost cutting at both of these companies may have whittled the kind of innovative thinking, dedication to building custodial capabilities and the disciplined processes that are necessary to meet this transformational challenge. For more information on an approach to accomplishing this, visit: http://www.beyondthedeal.net. That can give you an idea of what the array of issues are and how to work through them for significant gains.

Jay Chatzkel

I don't know that it makes sense for a company to buy another company instead of investing in more workers and equipment, unless you think that your company has already maximized its profit. Maybe the Intel merger is less about expanding Intel's operations and more about Intel's management deciding to artificially book profit for the sake of Wall Street when the computer hardware industry is in slowdown? Certainly buying profitable companies has helped the bottomlines of many companies, Google being a particularly noteworthy example.

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