There is still a fair amount of uncertainty in the economy, and the stock markets only continue to fluctuate within a narrow range. Yet big merger and acquisition transactions continue to take place both in this industry and around the world. How is this possible?
The Latest Acquisitions
Just in the last few months, the Carlyle Group has acquired NBTY, BASF agreed to acquire Cognis, Corn Products International agreed to acquire National Starch, and Aker Biomarine/Lindsay Goldberg (private equity fund) acquired EPAX. If companies are investing their cash in the equity of these businesses, it could be considered a bullish move, since this likely means they are optimistic that economic prospects are looking up. In listening to the financial press, however, there may be other motivations for striking these deals.
A lot of financial columnists are claiming that companies were hoarding cash throughout the financial crisis and economic downturn. Because the downturn lasted so long, naturally investors started getting anxious, so they were either looking for companies and funds they invested in to return their money via a dividend or put the money to work through investment. This could be one reason for the recent acquisition frenzy. But notice that there have not been any large nutrition companies making the mega-deals lately. Even the Cognis-BASF transaction was completed because the private equity owners of Cognis were ready to sell.
In actuality there are a limited number of companies in this space that can afford the mega-deals. The table below pulls out details on NBTY, Herbalife, NuSkin, USANA and Schiff, all of which have more than $200 million in annual sales. This shows their cash balances near the end of 2007 (before the crisis began) and in the spring of this year (the latest quarter for which all companies have reported data at the time this column was written). What you see is that only one company—NuSkin—actually increased its cash substantially.
All of these companies in fact grew during the crisis, and since cash is used in part to finance the ongoing sales of the business, it is also important to look at how the cash they have on hand can cover their expenses. If they were truly hoarding cash, you would expect the number of “days cash on hand” to increase substantially and/or grow significantly beyond their peers. You calculate this by dividing a company’s cash balance by its daily operating expenses. The table below shows that while NuSkin increased its total cash balance the most, it was not to a level that would be unexpected. The outlier is actually Schiff because it is holding onto 122 days worth of cash requirements, but it is even hard to build the case that it is hoarding cash as a result of the crisis because it is holding less cash than before the crisis.
Most of the large nutrition industry deals have primarily been motivated by private equity interest. Private equity firms who held onto cash throughout the financial crisis would be under even greater pressure to put their funds to work. Investors in these funds specifically pay the fund managers to invest their money, so they have a tendency to grow more impatient. The nutrition industry looks particularly attractive to these funds because sales have grown throughout the downturn, although valuations have been somewhat depressed because they are largely following the broader equity markets.
So while we have seen some acquisitions lately that would be considered large transactions for our industry, it isn’t likely that we will see too many more without the help of private equity.