High-yield/macroeconomics (fka YIELD)

[Preciouslife1]

Cash-rich companies see opportunities amid turmoil
Thu Oct 23, 2008 3:46pm EDT

http://www.reuters.com/article/innovationNews/idUSTRE49M85620081023?sp=true

PHILADELPHIA (Reuters) - Companies as diverse as fertilizer maker Potash Corp (POT.TO: Quote, Profile, Research, Stock Buzz), pharmaceutical firm Merck & Co Inc (MRK.N: Quote, Profile, Research, Stock Buzz) and steelmaker Nucor Corp (NUE.N: Quote, Profile, Research, Stock Buzz) all have one thing in common: they view the financial market turmoil as opening up acquisition opportunities.

Companies with strong balance sheets and the luxury of cash may pursue acquisitions even though most dealmaking has been frozen by the lack of funding available in the credit markets.

Overall, the volume of mergers and acquisitions has dropped 24.7 percent so far this year worldwide, and fallen 29.7 percent in the U.S., according to Thomson Reuters data.

Despite this drop in total M&A, deals by corporations have seen less of a decline, softening only 12.3 globally and 7.6 percent in the U.S., according to Thomson Reuters data.

"There are a lot of companies sitting on significant cash that we think will be used once there's some stability in the market," said Tim Ghriskey, chief investment officer of Solaris Asset Management.

"The availability of credit is difficult, but if a company has the ability to finance it themselves and they have the cash on their balance sheets, they can do it," Ghriskey said.

Many of the recent deals forged amid the credit crisis where done under duress or timed to help ailing companies, such as the takeover of Bear Stearns by JP Morgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz), the planned acquisition of Constellation Energy Group Inc (CEG.N: Quote, Profile, Research, Stock Buzz) by MidAmerican Energy and the planned takeover of Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) by Wells Fargo & Co (WFC.N: Quote, Profile, Research, Stock Buzz).

OPPORTUNISTIC BUYING

The next wave of deals could be powered by companies looking to take advantage of the market downturn to find cheap assets, analysts said.

"Opportunities in front of us are greater today than before and were not there a few weeks ago," Nucor Chairman, President and Chief Executive Officer Dan DiMicco said earlier this month. "Everybody's stock price has been beaten to death."

Drugmakers Eli Lilly & Co (LLY.N: Quote, Profile, Research, Stock Buzz), Roche Holding AG (ROG.VX: Quote, Profile, Research, Stock Buzz), Merck and Bristol-Myers Squibb Co (BMY.N: Quote, Profile, Research, Stock Buzz) have said that the financial crisis, by lowering the values of other drugmakers, could help them make acquisitions or forge drug-development deals.

"Right now the biotech companies are probably going to struggle the most in this environment," Eli Lilly Chief Executive John Lechleiter said.

"Certainly traditional sources of funding and the traditional capital markets that biotech companies have accessed are withering right now," Lechleiter said. "I think there is a sense that Big Pharma could provide that capital that many biotechs are looking for."

Companies in other sectors have been equally vocal about the opportunity for acquisitions.

Early this month, U.S. life insurance company MetLife Inc (MET.N: Quote, Profile, Research, Stock Buzz) raised $2 billion in fresh capital and said it was a moment of "real opportunities" for acquisitions.

Bill Lyons, chief financial officer of coal miner Consol Energy Inc (CNX.N: Quote, Profile, Research, Stock Buzz), said smaller rivals with substantial debt would be hit the hardest by the global economic slowdown.

Consol could benefit from that, since it "has liquidity and robust cash flows and is in an excellent position to take advantage of opportunities out there," Lyons said.

Meanwhile, Potash Corp of Saskatchewan (POT.TO: Quote, Profile, Research, Stock Buzz) (POT.N: Quote, Profile, Research, Stock Buzz), the world's largest fertilizer maker, this week increased its stake in Israel Chemicals Ltd (ICL.TA: Quote, Profile, Research, Stock Buzz) and said it may see more buying opportunities.

"We think there are opportune times right now. Certain competitors of ours may find themselves to be in a leveraged position unexpectedly and there may be opportunity for us to take advantage of that," Chief Executive Bill Doyle, said on Thursday.

WHY SELL ON THE LOW SIDE?

With the Standard & Poor's 500 Index down 40 percent this year, and the Dow Jones industrials average off 36.5 percent, would companies be willing to sell at such cheap levels?

"You get benefits even if you don't sell on top of the market," said Carsten Stendevad, Global Head of Citi's Financial Strategy Group. "In fact, the market reaction to asset sales is particularly strong in bear markets."

A study by Citi's Financial Strategy Group found that companies announcing divestitures have outperformed risk-adjusted market benchmarks over the short-term and long-term.

"Divestitures undertaken by poorly performing firms and divestitures initiated in weak economic environments have been particularly well received by investors," according to the Citi research.

"Selling assets is emotionally difficult for most companies," Stendevad said. "Yet, the rewards from selling are clear: investors consistently reward companies for selling, and sellers generally receive multiples expansion one year after the sale."

(Additional reporting by Steve James, Michael Erman and Juan Lagorio in New York, Roberta Rampton in Toronto, editing by Gerald E. McCormick)