Not All Destruction is Created Equal

We've written several times in this commentary on equity supply destruction and its ability to drive stock prices higher. (See our past commentaries: "Mergermania" and "Even More Destruction")

However, we've recently noted an impressive feature about the state of Mergermania: the predominance of cash deals. Simply put, many mergers and buyouts are not being executed with massive new levels of debt, but with available cash sitting in corporate balance sheets.

Here are a few new facts:

• Cash M&A is at record levels. The $375 billion in cash takeovers in the US alone so far in 2006 is well above the $258 billion record set in 2005 and is 50% higher than the levels in 1999 and 2000.
• Last week was the third $90+ billion week for global mergers in 2006, coming to and $2.1 trillion so far this year – close to the record $2.15 trillion in all of 2000. And we've still got a month to go!
• US share repurchases in the third quarter, at $110 billion, are on par to beat the record set in the second quarter, at $117 billion, and are already up 35% from a year ago. The unprecedented repurchase activity and the resulting reduction in supply have already had a material impact on EPS for over 20% of the S&P 500 stocks.
• Despite the $1.9 billion in new stock offerings and $340 million in insider selling in Europe last week, European equity supply still remained nearly unchanged as the $2.3 billion in stock repurchases on the London Stock Exchange offset the new share issuances.

The skeptic might say: ‘Sure, there are a lot of deals, but in a global market with trillions of dollars changing hands each day, can this merger activity really make a difference?'

Look at it this way: the market capitalization of the NYSE composite index is around $21 trillion while the NASDAQ composite index is around $4 trillion. Removing one, two or three blue chip companies doesn't make much of a dent in a $25 trillion marketplace—but it adds up. If leveraged buyouts and share repurchases total $1 trillion this year, which is entirely possible, that's 4% of the combined capitalization of all NYSE and NASDAQ stocks.

This is incredible equity supply destruction . . . done with a higher percentage of cash transactions than ever. Finding an effective use for cash and not over-levering in the process is a sign of a very healthy global corporate world.