"So much cash, so much cash!"

Looking at the 2009 balance sheets of the largest European companies brings to mind the famous statement by Mac Mahon at the massive flooding of the Garonne river in 1875 “So much water, so much water!”

Barely a year ago, the mere presence of debt in a company’s balance sheet made it an ugly duckling on board a drunken ship destined to sink. After 10 years of adulation for leverage in all forms (private equity, hedge funds, structured products etc.) the market suddenly fell out of love and agressively sold off all companies shouldering debt.

Today, the stakes have changed again. These brutally neglected companies have managed to react intelligently and make their absence felt. Crédit Agricole Cheuvreux estimates that a quarter of the 200 largest European companies have now restored a net cash position. By reducing investments and increasing control of working capital requirements while draining their debt, these companies, abandoned by their banks, have succeeded in preserving a remarkable level of cash despite the plunge in their sales levels.

A just turnaround, this work on cash flows has also been accompanied by enhanced managment of financing sources and a multiplication of candidates for financing. The record level of private bond issues in 2009 (€255bn vs. an average of €123bn in the previous five years) testifies to a rebalancing of financing methods at major companies with fewer restrictive and versatile bank debts and more bond debt, slightly more expensive yet more flexible and understanding.
While the recent crisis has pushed sovereign states throughout the world into spending and loans that now scare lenders, the paradox of this period is that the majority of European companies are now starting 2010 with a healthy balance sheet showing reasonable and welcome financial leverage.

The question therefore remains as to what these healthy companies are set to do with the cash at their disposal: “Mergers and acquisitions” sing out investment banks always ready to seduce and whose volume of operations ($1.793bn) has been in free fall since 2007 ($4.050bn). They now dream of the volume levels witnessed at the beginning of the decade. Oh how sweet the early 2000s were and the emblematic operations including the famous $164bn hold-up of TIME WARNER by AOL and the $170bn hostile bid for Mannesmann by VODAFONE.

Sweet dreamers or smart bankers? The backdrop of low rates and cart-loads of available cash blocked in money-market funds and which no longer provide returns makes possible financing that still seemed problematic a year ago. Combined with valuation levels that remain reasonable in an economic environment that is stabilising, a return to M&A activity is clearly feasible and highly likely.

As such, the renewed attraction and interest in these now very appealing companies is understandable. While mega-mergers are probably not the name of the game, the search for market share and sales has already started, particularly in the US since the autumn. Indeed CADBURYS, MARVEL, NBC UNIVERSAL and MEAD JOHNSON are all targets that predators could absorb (NESTLE alone boasts $25bn in cash).

At the start of the year, we welcome this restored appetite for corporate attractiveness that guarantees a dynamic stockmarket. And since we started this piece with a quote from Mac Mahon, we will finish with another one summing up equity markets in 2010, “I’m here. I’m staying here!”.