Investing in Possible Buyout Companies #2

This is the second in my series of blogs on investing in possible buyout companies. I did a lot of work data mining financial data this past week (market cap and dividend yields are for the week of September 6, 2010). I started by reviewing companies that would be in a position to buy companies because they have sufficient cash. I evaluated the top 50 companies listed on US stock exchanges by total amount of cash or cash equivalent on-hand based on their latest filings, deleting all financial companies for example, insurance providers, banks, etc.

I found some interesting data on the top 50 non-financial companies:

• Total market cap: $3.75 trillion

• Total cash: $628.5 billion

• Total debt: $852 billion

• Average dividend yield: 1.70% (the dividend yield is less than the S&P 500 index yield of 1.91%).

Table 1 - Top 15 non-financial companies by total cash or cash equivalent. This list includes 7 technology companies, 4 healthcare companies, 2 energy companies and 2 companies with part of their business in financial services (Ford and General Electric).

Company Name Market Cap Total Cash
(US $ billion) (US $ billion)
1. General Electric (GE) 165.07 73.85
2. Cisco Systems (CSCO) 117.06 39.86
3. Microsoft (MSFT) 207.34 36.56
4. Google Inc. (GOOG) 148.01 30.06
5. Ford Motor Company (F) 40.58 30.05
6. Apple Inc. (AAPL) 235.53 24.29
7. Pfizer (PFE) 131.27 19.27
8. Johnson & Johnson (JNJ) 161.69 18.90
9. WellPoint (WLP) 20.95 18.59
10. Oracle (ORCL) 121.96 18.47
11. Intel (INTC) 100.89 18.30
12. Hewlett-Packard (HPQ ) 92.69 14.72
13. Amgen Inc. (AMGN) 50.33 14.52
14. Exxon Mobil (XOM) 308.31 13.27
15. Chevron (CVX) 154.92 13.22

Table 2 - Top 15 non-financial companies by total cash or cash equivalent minus total debt. This list includes 10 technology companies, 3 healthcare companies, 1 consumer company and 1 energy company. It’s interesting to note that the top 5 companies are technology companies.

Company Name Market Cap Total Cash - Debt
(US $ billion) (US $ billion)
1. Microsoft (MSFT) 207.34 30.59
2. Google Inc. (GOOG) 148.01 30.06
3. Cisco Systems (CSCO) 117.06 24.58
4. Apple Inc. (AAPL) 235.53 24.29
5. Intel (INTC) 100.89 15.89
6. WellPoint (WLP) 20.95 9.29
7. QUALCOMM (QCOM) 65.12 8.69
8. Johnson & Johnson (JNJ) 161.69 7.25
9. Dell Inc. D(ELL) 23.96 7.18
10. Humana Inc. (HUM) 8.61 6.97
11. Amazon.com (AMZN) 61.45 4.98
12. eBay Inc. (EBAY) 30.88 4.90
13. Motorola (MOT) 18.27 4.79
14. Nike (NKE) 35.75 4.56
15. The AES Corp. (AES) 8.73 4.31

Table 3 - Top 10 non financial companies by percentage of total cash minus debt dividend by total market cap. This list includes 7 technology companies, 2 healthcare companies and 1 energy company.

Company Name Market Cap Cash - Debt/Market Cap
(US $ billion)
1. Humana Inc. (HUM) 8.61 80.95%
2. The AES Corp. (AES) 8.73 49.31%
3. WellPoint (WLP) 20.95 44.34%
4. Dell Inc. D(ELL) 23.96 29.96%
5. Motorola (MOT) 18.27 26.22%
6. Cisco Systems (CSCO) 117.06 21.00%
7. Google Inc. (GOOG) 148.01 20.31%
8. eBay Inc. (EBAY) 30.88 15.86%
9. Intel (INTC) 100.89 15.75%
10. Microsoft (MSFT) 207.34 14.75%

These are very interesting tables. The first and second tables show companies that have the cash to buy other companies. The third table is also very interesting in that it shows companies that could be bought by other companies for their cash (or they could use their cash to buy companies). If you review these tables it shows why most financial analysts expect technology, energy, healthcare and commodities companies to lead the buyout surge in the coming years. These sectors are shielded more from the current financial downturns, depending less on discretionary consumer income.

The overall weak economy will aid companies that want to buy companies for 2 major reasons. The first reason is that many companies are undervalued (pre current financial downturn) and companies with high credit ratings can get very low-cost debt financing. Companies with a lot cash and low debt have high credit ratings (just like consumers). For example, in early August 2010 IBM issued a $1.5 billion note. The 3 year note had a coupon rate of only 1%. On August 4, 2010, a 3 year US government treasury note interest rate was .86%. For the risk of buying a IBM 3 year note you only get an additional 14 (.14%) basis points of interest rate versus the risk free 3 year US treasury note (the US treasury has a printing press to print money and IBM does not). This is one of the reasons that IBM’s CEO said IBM will be an aggressive buyer of companies over the next 5 years, spending around $20 billion to acquire companies.

In a future blog I will be reviewing companies that have a history of buying companies. For example, Cisco and Intel have been very active in acquiring companies in the past couple of years as opposed to Apple which historically has not acquired companies. I will also review what companies are possible buyout candidates by business sector, market cap size, etc.

Please chime in with comments about what companies will buy out other companies, what companies / business sectors will be good buyout candidates. Is this a good investment strategy?

© 2010 Paul Cusick