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Wondering what to do with excess capital? How too much cash is driving M&A activity...

17 May 2017
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In association with Avondale

With traditional means for growth becoming more difficult, businesses are having to identify new ways to invest their capital – strategic M&A has become a key path to growth. 

While economic uncertainty dominates the headlines of the world press, company balance sheets are looking healthier than ever. Global financial assets now equal more than $700 trillion – while in 1990 this figure was just $220 trillion, according to studies by Bain & Company. 

On the way up – and fast!

There are contributing factors for this. For almost a decade, interest rates in the developing world have been stuck at all-time lows. Nevertheless, with attractive investment strategies few and far between, many companies decide not to pursue organic growth strategies, preferring to stockpile cash instead.

In particular, eight "trillion-dollar growth trends" that are set to grow global GDP by at least $1 trillion by 2020, have been identified by Bain's Macro Trends Group. According to Bain’s projections, by 2020, corporate financial assets will reach $900 trillion (equivalent to around 1000% of global GDP), and are on course to surpass a quadrillion dollar by 2025. Even though emerging market assets will provide much of this growth momentum, the balance sheets of Western companies will retain around 60% of the planet’s working capital.

If you have it, spend it

Conventional wisdom suggests that financial capital is an important resource that should not be spent. This argument may have been solid in previous decades, but in a stagnant economic era, shareholders are putting today’s leaders under growing pressure to create growth out of high cash reserves.  Meanwhile, in the United Kingdom, concerns over a government tax levy on capital has led to companies becoming more willing to invest capital before it’s taken from them.

With conventional, organic paths to growth becoming less available, mergers and acquisitions have become an important outlet, with global M&A deal activity reaching an astounding $3.2 trillion in 2016. 

Innovation is the order of the day

In terms of innovation and technological advances, the last few years have been among the strongest in recent history, even though business expansion has remained modest. Businesses are having to think and be creative in order to find the few remaining pockets of growth in an increasingly competitive landscape.

With investment finance readily available, the last few years have been an incubator for innovation in fields such as FinTech, cloud computing, machine-learning, and bio-technology. Vehicle makers, faced with slowing demand in first-world countries, are keen to invest in self-driving car technology. 

Strategic M&A – the new path to growth

However, not all companies have the financial clout of Google and some are seeing that it is more lucrative to buy in assets and expertise, rather than developing their own.

A second generation of M&A activity is in the pipeline. Rather than pursuing sizeable, “scale” M&A deals – with a focus on industry consolidation and achieving economies of scale – the current superabundance of capital enables companies to experiment and take risks with acquisitions. Big corporates, as well as slightly smaller entities, are increasingly choosing to go for smaller, strategic purchases in order to add new products, or compete in new markets.

While considered riskier at the start, smaller, strategic deals usually provide better returns, over a longer time. The Harvard Business Review suggests that small acquisitions typically create additional annual shareholder value of between 8.2% and 9.3% over several years, compared with the 4.4% average of bigger deals.

It’s a pathway being taken by leadership teams around the globe. Although global M&A deal values fell by around 25% overall in 2016, the quantity of deals that took place increased by about 1%, suggesting high levels of deal activity at a lower and mid-market level. This momentum has been taken through into 2017: the UK saw a 21% increase in national deal volumes in February, with the increase underpinned by a big rise in small and mid-market transactions.

At a time of readily available capital, strategic M&A can be an attractive and necessary route for long-term growth, while limiting risks associated with stockpiling large amounts of capital. For both buyers and selling companies, opportunity is ripe. 

The views expressed in blogs such as the above are those of the author and do not represent the views of the Institute of Directors.


Strategic M&A Conference

This IoD conference, in association with Avondale, is a perfectly timed to harness the power of Strategic M&A and create competitive advantage in today’s complex and rapidly evolving global marketplace. Join us on 5 July 2017 at 116 Pall Mall.

In an ever-changing corporate landscape, successful leaders recognise that M&A is critical to business strategy – whether acquiring, creating shareholder value, merging or selling.

Book tickets


IoD members can access discounts from Avondale, the IoD’s preferred provider of business sales, acquisition and strategy services.

01737 234892  Avondale  Find out more


Headshot of Kevin Uphill, Chairman, Avondale

Kevin Uphill

Kevin Uphill enables business owners to enhance equity value, and maximise business sales and acquisitions via mentoring. Working with his team, he is also a successful lead dealmaker through his professional practice, Avondale. As well as being a business strategist, he runs a series of thought-provoking, content-rich and inspirational keynote speeches, seminars and masterclasses – regularly endorsed internationally – for creating business growth and transaction success. 

Kevin Uphill is a member of IoD Surrey.

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