Remember playing Monopoly?
I loved the game (at least for the first hour or so of play)!
Everyone had a different strategy, but the flow of the game was pretty similar every time we played. Early on in the game, people were buying properties left and right at market price.
As properties became scarce, each player began trying to find a way to increase their revenue (rental) streams. This led to people offering higher and higher prices for properties (without even taking into consideration return on investment). This is just a classic example of supply & demand.
But as options for revenue became limited, the need to look elsewhere became necessary.
We are living in a mid-stage game of Monopoly right now. Companies have hoarded cash and are now looking for ways to spend it. They have seen revenues increase, but shareholders want them (and profits) to increase more and at a quicker clip.
Last night, news broke that AT&T was going to buy DIRECTV for $48.5 billion; while Pfizer upped its bid for AstraZeneca to nearly $120 billion, which was turned down this morning.
These recent offers and deals come after Comcast and Time Warner agreed to lock up in a deal worth nearly $50 billion. Facebook bought WhatsApp for nearly $20 billion and Apple is on the verge of buying Beats Electronics for $3.2 billion.
Money seems to be flying around Monopoly style, but it still doesn’t seem like the game is nearing an end.
The average deal size that we are seeing is in line with what we saw in the late ‘90s. Uh-Oh… a bubble is on the loose!
No, not so fast.
In the late ‘90s, leverage was king. Today, cash is king. This makes deals harder to come by but also limits those that are taking part in such deals.
Look at debt and cash per share growth for S&P 500 companies from 1998 to 2013. Debt increased by 33%, while cash increased 283%!
Companies have spent the last five years de-leveraging and building cash. Now they are looking to put it to work. Some may argue (with very good points) that this isn’t the best use of money for companies longer term, but that’s a topic for another week.
(All data used within The Capital Course was provided by Ned Davis Research)