With debt cheap and plenty of cash on the books, companies are primed to make deals -- just not so fast, taking months instead to build up their balance sheets in preparation for the next big deal.
The energy sector is just one of many where deal-making has surged as corporate confidence turns up. Already, data from Dealogic shows that the total value of U.S. transactions in 2013 is roughly double what it was during the same time in 2012.
Linn Energy, for example, had been preparing to buy a company like Berry Petroleum - a company it acquired in February for $2.5 billion - for more than a year. The Houston oil producer, while still buying assets for its parent company, was hard at work on an alternative financing vehicle - LinnCo - that it finally spun off in October as a vehicle to buy businesses.
For Linn CFO Kolja Rockov, the new structure will serve as a new form of a deal financing for a company that previously just bought the assets outright. In Rockov's words, "It's just another arrow in our quiver."
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While sentiment is rosy, the CFO suite – Rockov's included – remains focused on the balance sheet. In a recent CFO study by Deloitte, respondents said the first priority was building defensive balance sheets that, first and foremost, protected a company's cash flow.
Investors have been pleading with companies (see: Einhorn, Apple) to release the mountains of cash that have stood on balance sheets since the financial crisis; according the Federal Reserve, that cash stood at $1.7 trillion at the end of Q3 2012, and grew throughout the fourth quarter as fiscal woes kept companies from spending.
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Companies are keeping one eye outward to monitor the deal environment, even while keeping the other inward in conserving cash.
Chris Foskett, global head of sales for JP Morgan Treasury Services, sees companies expanding credit facilities – instead of spending that precious cash – to lock down low rates for opportunistic deals. "That offers available liquidity, but also – eventually – will let them act quickly."
General Motors did just that, upping its credit facility in November 2012 to $11 billion from $5.5 billion, two weeks before it announced a $4 billion deal for international assets of Ally.
Thomasville, Ga.-based bakery Flowers Foods did the same thing as it anticipated a potential bid for Hostess Brands, once a bankruptcy judge put the company in liquidation. Flowers extended its existing credit facility for $700 million instead of the pre-existing $500 million in a move that CFO Steve Kinsey at the time said allowed the company "to take advantage of an assortment of opportunities" toward expansion.
Months later, Flowers won the so-called "stalking-horse" – or, leading – bid, and will have the money on hand should it win the final auction in bankruptcy court next week.
And for Flowers' cash on hand? That will get saved for a rainy day, or just day-to-day business.
Foskett believes cash levels will stay elevated as companies won't soon forget the liquidity drought of 2008 and 2009. "No one wants to get caught where they were in the last crisis."
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