A new kind of deal for 2012?

Buying companies with cash at bank

You only find out who is swimming naked when the tide goes out, as Warren Buffett said. No-one wants to be vulnerable to further economic shocks. Since 2008, companies have been rebuilding their balance sheets. Many successful companies have built up significant cash reserves. They remain reluctant to invest in major expansion or in acquisitions.

Professionals in the M&A market have been waiting for confidence to return so that companies start to spend this cash on acquisitions. But the continuing Eurozone crisis means that no-one is buying, despite the many businesses available at bargain prices. Lack of demand the absence of bank funding for acquisitions keeps values low, even though many businesses are making good profits.

But will we see a new type if deal emerging in 2012: acquisitions funded partly with the target’s own cash?

Cash-rich companies make juicy low-risk acquisition targets for buyers who might be slightly more vulnerable, or for those looking to expand. Selling a company with its cash is highly tax-efficient for vendors. The legal rules banning financial assistance by the target have largely been abolished. If the price is deferred or settled in paper, or at a discount to the cash, the deal can become partly self-financing.

Wishing all bargain-hunters, keen sellers and market professionals a prosperous 2012.