Investment Insider: Think like a predator if you want to make a killing
Invest in sound bets – that’s what cash-rich US firms are looking for
Saturday 13 July 2013
American companies are sitting on a serious amount of cash. It is reckoned that collectively they are hoarding as much as $1.4 trillion, which translates to almost £1 trillion, about the worth of the British economy. More than half the money is held overseas because of the prohibitive taxes that have to be paid when US companies repatriate the cash.
Consequently, the overseas cash pile could continue to swell unless the US government relaxes the rules regarding the remittance of money back to America by US companies.
Most of us are already aware of Apple’s cash hoard – it is estimated to be worth about $140bn. But Apple isn’t the only company that is drowning in cash – a host of other hi-tech businesses are in similar positions. These include Microsoft, Google and Cisco Systems that together hold $162bn in readies.
Elsewhere, pharmaceutical giant Pfizer is estimated to have a cash pile of $46bn – enough to buy somewhere like Macao.
Interestingly for investors and also for global economies, US corporations could more than take up the slack should the US Treasury decide to scale back its money-printing programme. The quantity of cash held by US businesses is more than 16 times the amount of money that Ben Bernanke has been pumping into the US economy every month. The question is, though, what could these cash-rich US companies do with their war chest? We know some of the cash has been used for capital expenditure. Some has been used to buy back shares and some to boost dividends. In fact, several companies have also made strategic acquisitions, which could turn out to be a recurring theme in coming years.
In the hi-tech sector, which is where most of the cash is, Google has already made a $1.3bn swoop for traffic-mapping and navigation outfit Waze. The deal, which is subject to regulatory approval, effectively cements Google’s position as the main player in mapping and navigation, particularly for motorists. But with $48bn in its coffers, it barely makes a dent in its cash mountain. Pharmaceutical giants Pfizer and Amgen are together holding as much as $70bn. Last year Pfizer, which has a cash pile of $46bn, ruled out any mega-acquisitions. That said, it indicated that it remained on the lookout for small bolt-on purchases.
Oncology, which is an area that Pfizer might be interested in, could bring Oxford BioMedica into play. The company, which already counts Pfizer as one of its partners, develops gene-based therapies. The two companies currently have a partnership for the development of an antibody for the treatment of cancer.
Scancell, which is developing a vaccine for melanoma, is another interesting company that could whet the appetite of cash-rich Pfizer. When cash is burning a hole in your pocket there can be a temptation to spend the money quickly. So, American corporations that are sitting on a mountain of cash could find the lure of cheap assets abroad too much to resist. As an investor, there are fewer events more delightful than being on the receiving end of a bid, which inevitably sends share prices soaring.
But don’t fall into the trap of speculating on a possible bid target. Look for a company that is fundamentally strong first – that is what a predator company will be looking for too.
David Kuo is director of fool.co.uk
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