M&A Rule

Alix StuartJuly 1, 2001

With the equity markets down and initial public offerings virtually nonexistent, fewer merger deals are putting stock in stocks. In the first four months of 2001, 30 percent of mergers relied solely on cash, the highest level since 1996, according to Thomson Financial Securities Data in New York. “Sellers used to be moderately indifferent about accepting equity, but when stock declines in value and becomes more volatile, equity becomes less attractive,” says Brian Heckler, a partner with KPMG.

One sector that has seen a dramatic shift to cash is the traditionally stock-rich technology realm. Forty-five per-cent of deals in the sector have relied solely on cash this year, compared with 15 percent last year, reports Thomson. “The risk profile of stock is so high right now, no one is really willing to take it,” says Paul Hammer, head of the technology, media, and telecommunications group at Houlihan Lokey Howard & Zukin, a Los Angeles­ based investment bank. “About the only people doing deals,” he says, “are private equity shops that always use cash, or the financially stable dinosaurs that are sitting on pots of cash.”

Indeed, big technology firms with sagging stock prices have been bargain hunting for strategic deals with their
cash caches. IBM Corp. sprang for Cambridge, Mass.-based Mainspring Inc., an Internet strategy consulting firm, in April with a $4 per share cash bid. The price reflected a 25 percent premium over Mainspring’s trading price of $3.20, but was considered cheap because the stock traded at an average of $5.09 in the fourth quarter of 2000. In March, Eastman Kodak Co. halted its stock buyback program $200 million shy of its $2 billion target so that it could go shopping. CFO Robert Brust says he wants to be certain Kodak is ready to seize growth opportunities.

Another reason for the prevalence of cash is the nature of recent transactions, says Rick Escherich, a managing director at J.P. Morgan. He says the volume of deals involving public company subsidiaries and private companies–both of which tend to rely heavily on cash because they don’t stand to gain from pooling–rose relative to deals between public companies, which are more likely to use stock. Also, cash is likely to become more popular among public companies when pooling ends this month, adds Escherich, because the accounting benefits of all- stock transactions will be diminished. — Alix Nyberg