Companies seek outlets for excess cash

M&A Perennial Value Asset Management WaveStone Capital HLB Mann Judd AMP Capital

6 August 2021
| By Laura Dew |
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An accumulation of cash on company balance sheets is likely to set the pathway for an increase in mergers and acquisitions (M&A) and dividends in the next financial year. 

An inability to spend during the pandemic and, in some cases, lower costs due to remote working had left firms with excess cash, believed to be as much as $100 billion. 

Speaking to Money Management, commentators suggested this would lead to increased buybacks, increased M&A and increased capital expenditure as firms sought to put the money to work. 

In the past few months, there had been bids for Sydney Airport by IFM Investors,, Telstra bidding for Digicel, Afterpay being acquired by Square and Santos merging with Oil Search. 

Stephen Bruce, head of research at Perennial Value Asset Management, said: “We are seeing lots of M&A, there is an enormous pile of money out there looking for a home, the appetite for anything stable is very strong.  

“It is not surprising that Sydney Airport has been targeted but that will spill into other markets such as telcos and healthcare. Healthcare is stable, it is government funded, REITS [real estate investment trusts] are already buying up healthcare properties and we are seeing ongoing consolidation.” 

Catherine Allfrey, portfolio manager at WaveStone Capital, said: “On the M&A front, Citibank Australia’s retail assets are for sale and we expect one of the major banks to buy. This follows Bank of Queensland purchase of ME Bank and NAB’s of 86400.   

“The insurers are still recovering from elevated claims in 2020 and low interest rates which are affecting investment returns. The fund managers are in growth mode preferring to expand offshore with Macquarie, Perpetual and Pendal buying US-based asset managers in the last 12 months. Yields remain healthy for the financial sector and we would expect growth in dividends for FY22.” 

According to data from HLB Mann Judd, there were 285 M&A deals completed in the second quarter of 2021 with an average deal size of $85.9 million. This was mostly in the materials, consumer discretionary and information technology space.  

Another alternative would be buybacks; big four banks NAB and ANZ both recently announced buybacks, with NAB announcing a buyback of $2.5 billion and ANZ detailing plans for a $1.5 billion one. Plato managing director, Don Hamson, said he expected to see the other two would follow suit. 

“Our view on the big four banks and the big three miners is very, very positive. We actually have a positive view on more than half the market in terms of dividends. So that is very, very well for dividends at the market level,” Hamson said. 

“Banks have significantly underperformed the index over the last four years, but they have started to perform strongly in the last six to eight months. We're starting to see a comeback from the banks, and we're certainly seeing the dividends come back.” 

Shane Oliver, chief economist at AMP Capital, said: “In the first instance, [cash] will likely be used to return capital to shareholders either as buybacks or more likely as dividends and we have already seen a lot of that this year as companies have increased or reinstated their dividends after they were cut last year”. 

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