Tuesday, May 13, 2008

Stay on cash; use it wisely.

In times of turmoil in the stock markets, companies with tons of cash in their balance sheets wake up to smell the coffee. They see acquisition opportunities abound and zoom in on assets going on the cheap. HP’s acquisition of EDS for $13.9 billion yesterday is a case in point.

So do activist investors like Carl Icahn, who was instrumental in Oracle's takeover of BEA Systems, has been buying Yahoo stock since Microsoft withdrew its offer May 3. Icahn reportedly owns about 50 million Yahoo shares, or about 4 percent of the company. The news comes just weeks after negotiations between the two faltered on price, after a protracted dance between Microsoft and Yahoo that started with the Redmond software giant's unsolicited offer on Feb. 1 for $31 a share. After the deal fell through because of Yahoo CEO Jerry Yang’s tough postures, Yahoo's shares have slumped as low as $22.97. That’s when Icahn moved in with gusto.

The HP deal means that companies with strong balance sheets - HP had nearly $10 billion in cash at the end of its most recent quarter - will be able to take advantage of the market's turmoil and snap up companies trading at steep discounts. Even with the premium HP is paying for EDS, the $25 per share price tag is still 17% lower than where EDS' stock was trading at about a year ago.

I look at a rough map of cash rich companies that could stir the hornet’s nest. The list includes not just the tech giants like Google, Oracle, Microsoft, Intel, Cisco or Apple, it also has companies having tens of billions of $ of free cash such as Exxon Mobil, Royal Dutch Shell, Chevron, Pfizer, Roche, Wyeth and Novartis. So far they’ve been using the cash for dividends, stock buyback or plowing it back in business. But when current businesses are shaky or as in the case of these Pharma majors where their drugs are about to go off patent, it’s prudent for them to look at biotech acquisition ops.

Makes sense.

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