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What lies ahead for mergers and acquisitions.

The prospects for mergers and acquisitions look a lot like my 4- and 6-year-olds on the top step of our backyard monkey bars: Smiling mouths, terrified eyes. Neither is going to move an inch until the other one flinches, at which point I have to run over to them, because they'll move so fast to grab the same bar that they'll collide.

To give you an idea of just how silly the opportunities are right now, we've been looking at companies that sell for a fraction of the cash they have in the bank, were the rest of the business to disappear. This is the kind of math I see at the arcade, when my 6-year old asks her little brother to trade his dollar for her quarter.

Long-range buying cash doesn't offer the best deals; I look for cash flow. That's very different from the more popular benchmarks, such as revenues or earnings (which can be the most misleading metric of all), that many investors focus on.

The average S&P 500 stock trades at around 8 times cash flow, which is just about a 50% discount to its 5-year average. But those are the "blue chips." You can find cheaper, less crowded stocks trading at half that valuation. If you could buy an entire business at 4 times cash flow it wouldn't take long to get all your money back. But since they're also called stocks, these facts are covered up by headlines that keep you far, far away right now.

As I've noticed in the past, however, cycles tend to, well, cycle. And as a result of the deep, violent collapse in all manner of asset prices, we're now planting the seeds for deals. By taking "risk-free" interest rates so low, the government is begging us to consider mergers and acquisitions again.

Consider the alternative to your cash flow returning your original principal in a business over the next 4 years (to say nothing of the possibility of underlying appreciation and capital gains, should those concepts remain legal), or guaranteeing yourself zero chance of appreciation until maturity in return for making about 1% on cash in a Treasury note. I'd point out that not once in history can I find an instance where the corporation that issued those Treasuries has offered increased cash flow to any investor prior to maturity.

Bottom line: Capital will seek a return again. And risky assets like businesses will look better and better so long as risk-free Treasuries promise less and less in return.

I might even suggest (but I'm still a bit early) that investors will once again realize that risk isn't measured in the description of a security -- stock or bond -- but rather by the length of the line made up of crowds wanting to purchase the same thing at the same time.
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No positions in stocks mentioned.
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