Over and over on this blog, I have strongly advocated external growth to complement organic growth.  Today the largest 500 non-financial American firms have nearly $1 Trillion in cash and short-term investments on their balance sheets.  That’s Trillion with a ‘T’! This represents roughly 9.8% of their assets.  What does that tell me?  Companies are continuing to hoard cash.

I believe this accumulation of cash will continue for some time because credit still remains scarce, CEOs are anxious about economic pressures and companies are unsure where government regulations are headed.  Given all of this, strategic buyers have a unique window of opportunity for the next 12-16 months to make bold moves.  My philosophy remains “If Not Now, When?”. You’ve seen us say it before.  I’m convinced that sound companies with strong balance sheets, capable management, and a solid plan for growth have an unprecedented opportunity to make strategic acquisitions.

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The M&A statistics for the third quarter of 2009 are in and show the vast majority of the deals getting done are strategic.  The economic crisis and concerns over deal financing continued to significantly hold down the number and value of deals when compared to the same period last year.  Today, a Wall Street Journal article by Peter Lattman reports that leverage is out and equity is in.  Although these numbers are grim, there is reason for hope.  A number of big name deals, such as Kraft-Cadbury and Disney-Marvel, have injected the market with some much needed optimism.  These types of deals are evidence that strategic deals are going to lead the way to recovery with private equity to follow – not the other way around.

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Back in December, I noted (and agreed with) one author’s proclamation that in the current economy, the balance of power in M&A has shifted from sellers to buyers.  The main reason:  With the credit market in a crunch, cash is king, and cash-rich companies hold a distinct advantage.

As these survey results show, this trend is continuing.  I believe this is true in the US as well.  Buyers are looking to protect themselves from a sour deal by adding in more escrows and earn-outs, along with more items covered in reps and warranties.  Due diligence has become more thorough.

Good companies are choosing to sit on the sidelines rather than risk a bad deal.  Grade ‘A’ sellers are also waiting for better days, if they can, or aren’t compromising. Cash is king and the king makes the rules.

Technorati Tags: Acquisition Strategy, acquisitions, Capstone, cash, David Braun, Growth, M&A, M&A News, mergers, Mergers and Acquisitions