What's Happening?
Top-rated U.S. companies are increasingly financing mergers and acquisitions (M&A) using equity and cash rather than debt, according to recent reports. This shift is largely driven by high debt costs and concerns over potential credit-rating downgrades. A notable example is Union Pacific's recent $85 billion acquisition of Norfolk Southern, which is expected to be financed primarily through stock and cash, with only $15 billion to $20 billion in debt. This trend reflects a broader move in the market, where $250 billion, or 11% of total M&A funding this year, has been stock-funded, and 15.3% has been funded by a mix of cash and stock. This is a significant change from 2024, where 14% of M&A funding was stock-funded and 7% was cash-and-stock funded. The narrowing gap between the pre-tax costs of equity and debt has made equity financing more attractive, as noted by Piers Ronan of Truist Securities.
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Why It's Important?
The shift towards equity and cash financing in M&A deals has significant implications for the U.S. financial landscape. By reducing reliance on debt, companies can avoid potential downgrades from credit rating agencies, which would increase their borrowing costs. This strategy also reflects a cautious approach in a volatile economic environment, where maintaining strong credit ratings is crucial. For investors, this trend may signal a more stable investment environment, as companies prioritize financial health over aggressive expansion. However, it could also lead to a decrease in investment-grade bond issuance, potentially affecting the bond market's dynamics.
What's Next?
As companies continue to favor equity and cash over debt for M&A financing, the volume of investment-grade bond issuance may fall short of previous levels. Analysts predict that M&A-related bond supply could total $225 billion in 2025, a decrease from past years. This trend may persist if interest rates remain high and companies remain cautious about increasing leverage. Stakeholders, including investors and financial institutions, will likely monitor these developments closely, as they could influence market strategies and investment decisions.
