Generational Bull Market Catalyst No. 2: The Record Corporate Cash Hoard
Corporate debt played a big role in the early stages of the bull market that began in 1982. Back then, there was a boom in corporate takeovers that used leveraged buyouts – or debt – to purchase target companies.
It’s a vastly different world today…
Yes, mergers and acquisitions (M&As) are once again on the rise. However, rather than using debt, these deals are being fueled by massive amounts of cash on hand.
According to Thomson Reuters, global M&A activity so far this year rose 3% from the same period last year to $1.6 trillion. Healthcare, which includes biotech, had the largest chunk of that, at $264 billion, more than triple the amount last year.
According to a study by business professors Amy Dittmar (University of Michigan) and Ran Duchin (University of Washington), U.S. firms are awash in cash.
In their study, Dittmar and Duchin found that, adjusted for inflation, companies had $234.6 billion cash on hand in 1980.
By 2011, the last year of their study, that number had skyrocketed to $1.5 trillion.
Of all U.S. industries, the technology sector is sitting on the biggest cash piles, with companies holding on average around 40% of their values in cash.
Much of that money will eventually flow back into the market in new products, M&As, share buybacks, higher dividend payments – and rising stock prices.