Cash Stockpiles Will Fuel Mergers: PwC

With banks more willing to lend money—and with corporate piggy banks filled to record levels—companies will speed up acquisitions in the next year ...
Helen ShawMarch 10, 2006

When Rex Tillerson, Exxon Mobil’s new chief executive officer, recently made his first appearance before analysts, he was reportedly quite clear about what he wouldn’t be spending his company’s burgeoning cash hoard on.

None of the company’s swelling earnings—which soared 23 percent to $10.3 billion in 2005, spawning nearly $45 billion in operating cash—would go to a special dividend, according to a story in the Financial Times last week. Special dividends, Tillerson sniffed, merely “scratch the immediate gratification itch” of shareholders.

Less clear was where, in fact, the energy company would be plunking down its cash. Still, although Tillerson was mum about the likelihood of any deal being made soon, analysts came away with the notion that Exxon Mobil might embark on some acquisitions in the natural-gas arena.

If the company did so, it’s likely that the company wouldn’t be alone. The most recent Duke University/CFO magazine Business Outlook survey, in fact, revealed a record high level of corporate cash holdings and reported that many companies that do plan to spend cash could spend it on acquisitions. The finance chiefs studied expect to boost cash holdings—already at an all-time high—by 2.6 percent in the next year. Fewer plan to use the cash to increase repurchases and dividends and to repay debt than to buy another company, according to the survey.

Factors currently at play in the economy are also likely to direct cash that way. “As executives look to 2006, they are finding it increasingly harder to satisfy shareholder expectations with organic growth,” said Robert Filek, a partner in the transaction-services group of PricewaterhouseCoopers. “Based on historical levels, interest rates are favorable and money is available, so it is a good environment [for mergers],” he said.

With banks more willing to lend money—and with corporate piggy banks filled to record levels—companies will speed up acquisitions in the next year to pursue growth, according to a forecast by Filek’s group at PwC.

The energy, telecom, utilities, and technology sectors are especially ripe for continued mergers this year, according to PwC. Indeed, the analysts’ speculation about an Exxon Mobil deal chimes with a prediction of the Big Four firm: The energy industry could experience the most M&A activity it has experienced since the late 1990s.

Independent oil companies in particular will speed up acquisitions, “if only because they need bigger balance sheets to offset the risks — both political and geological — of drilling in those parts of the world where opportunities for bigger projects exist,” according to PwC.

In the telecom sector, increasing cost pressures on the large phone companies—and competition among them—are forcing companies to increase their scale and become more efficient on a per-transaction basis, observes Filek. The strategy of pursuing cost cuts through increased scale is also a strategy in the utilities sector, he added.

More mergers between local and regional utilities are expected as a result of favorable regulatory reforms involving industry industry, said Filek. Taken together, he says, a fragmented utilities industry, strong corporate balance sheets, and good credit ratings hold promise of consolidation.

In the financial services sector, senior managements have grown aware the pitfalls of the 1990s strategy of one-stop shopping, according to the PwC dealmaker. Rather than making acquisitions to diversify offerings as they did in the 1990s, financial firms are now acquiring with an eye toward their core competencies.

Technology companies that lack adequate competitive scale could be good candidates for divestiture or acquisition, the report’s authors note. PwC expects consolidation in the enterprise software area as the major players jockey for dominance and push their products in the retail and financial services markets.

Overall, the urge to merge won’t be deterred by increasingly rigorous boards of directors, Filek forecasts. “What CFOs are finding is that [boards] are doing more thorough, up-front due diligence,” noted Filek.