Cash management shift boosts M&A
A shift in corporate cash management is boosting mergers and acquisitions worldwide to levels that are close to deal activity just before the financial crisis, according to research by SunGard.
M&A deals totalled $2.49 trillion in value globally in the first three quarters of 2014. That didn’t quite reach the $2.93 trillion in deals done worldwide in the first three quarters of 2007, but it exceeded annual totals for each of the past six years, according to corporate financial analysis by Mergermarket.
War chests of surplus cash, expanded during the global financial crisis to buffer against revenue shocks, continue to grow, but they are increasingly used to finance M&A deals, SunGard found in its surveys of more than 150 companies worldwide over the past four years. SunGuard provides software and technology services to the financial industry.
Forty-nine per cent of companies participating in the 2014 poll increased their cash balances, up from 37% of companies participating in 2012, according to the SunGard Corporate Cash Investment Report 2014.
The number of treasurers who said they need immediate access to all cash dropped from more than 40% (46% in 2013 and 42% in 2012) to 33% in 2014, according to the report. Also, companies that held surplus cash primarily to protect the business against a potential revenue shock decreased to 11%, from 17% in 2012.
At the same time, the number of companies that held surplus cash primarily to finance investments or M&A deals rose to 33% in 2014, from 27% the year before, SunGard found.
“It’s fair to say that M&A is back,” Jeffrey Liu, EY global technology leader, transaction advisory services, said during EY’s 2015 Outlook IPO and M&A panel last month. EY’s most recent global capital confidence barometer report suggested that 40% of executives polled expect to pursue acquisitions in the next 12 months, up from 35% a year earlier and 25% in 2012.
New challenges
The shifts in cash management create new challenges for companies, SunGard suggests. Strategic issues are taking precedence over operational concerns, and treasurers are considering new investment procedures.
In 2011, corporate treasurers’ greatest investment challenges were mostly process-driven. Nearly half of them were primarily concerned with highlighting cash flow forecasting. By 2013, with new regulation in place and a more global marketplace, 58% of treasurers were most concerned with finding suitable investment instruments. Unlocking trapped cash held in regulated markets was also a big concern. Forty-three per cent, for example, worried about cash trapped in China.
In 2014, lack of suitable investment instruments remained a top concern (31% said it was their top concern). Trapped cash also remained a major issue.
Respondents in the 2014 SunGard survey also said they were considering new investment procedures such as electronic dealing and investment instruments. For now, deposits remain the most popular investment instrument (80% of respondents).
Related CGMA Magazine content:
“Corporate Treasurers’ Strategic Role Growing”: Corporate treasurers are taking on increasingly strategic roles as organisations manage high cash reserves in the aftermath of the financial crisis, according to a report by the Association for Financial Professionals.
“Companies Could Unlock Billions Through Optimised Working Capital Management”: A study by PwC estimated between €896 billion and €1,415 trillion ($1.1 trillion and $1.8 trillion) could be released from balance sheets globally through improved working capital management.
“Organisations Mainly Cautious When It Comes to Corporate Cash”: More large multinationals were growing cash reserves than shrinking them, according to an annual survey. Those that had cash reserves decline most often pointed to capital expenditures as the reason.
—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.