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:
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.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.