Back in the housing bubble heyday better known as 2005-2007, consumers were dipping into their HELOCs (Home Equity Lines Of Credit) like they were bags of Doritos.
As a result of this “use it or lose it” mentality, folks used their newfound “wealth” to buy things they never would have bought just a few years before. They ended up losing much more than just their equity because they bought things that cost money to own (via additional property taxes, annual interest payments, or depreciation). They spent money. This is very different than investing money.
We are seeing a flurry of M&A (Merger & Acquisition) activity to start 2013 – Warren Buffett’s $23B purchase of Heinz last week is one example, but there are several others that are equally notable (Liberty Global’s $16B cash and stock buyout of Virgin Media; Comcast buying the rest of NBC Universal from its parent GE for $16.7B, $11.4B of which was cash; Kinder Morgan buying Copano Energy Partners for $3.2B in stock). There were also two mergers that probably mean a little less: the shotgun wedding of OfficeMax and Office Depot who are both losing share to Staples, Costco, and Amazon; and the wrangling of two wounded calves in the US Air / American Airlines merger, creating a slightly more formidable contestant in the three-legged race that is the airline industry.
Could these acquiring companies be leveraging their recently inflated stock prices as a means of making purchases they could not afford until now? Maybe. Often times companies will buy another company with stock, or stock and cash, rather than the very rare “all cash” deal. As a CEO, when my company’s stock appreciates by 25% but there are no meaningful increases in the Liability column, I’ve got a lot more capital to play with. 25% more, to be exact.
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So how is this any different than what we as consumers did just a few years prior?
An investment is something that will generate returns over time through appreciation, income, or both. Companies and their Executives understand (most of them, anyway) the difference between an expense and an investment. The deals mentioned above were not done willy-nilly. It’s not like these CEOs were shocked to see their firm’s balance sheet looking so good one Monday morning and instructed their business development teams to “Go out there and find something to buy! Anything!!” These were carefully constructed deals that happened because the acquiring company saw inherent, long-term value in making the investment and, thanks to favorable market conditions, the timing was right.
We have certainty – in the direction of our housing market, the stability of our currency and tax code, and the strength of our consumer. There will be bumps, for sure, but we may be headed higher still in 2013. The CEOs of these world-class operations know the difference between spending and investing money. This is not the same as folks haphazardly buying a vacation home with newly created home equity. This is an example of market leaders doing what they do best: Leading.
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Have a great weekend!
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
(310) 772-2201 – Main
(310) 496-2822 – Fax