Cash Hoarding & Velocity

M&A Seen Rising Even as Firms Hoard Cash, Fitch Says (Update1)

May 12 (Bloomberg) -- More European investors expect merger and acquisition activity to rise this year, even as companies continue to hoard cash, according to a survey of fixed-income investors by Fitch Ratings.

The proportion of investors expecting M&A to reach “significant” levels in the next 12 months doubled to 15 percent over the last quarter, Fitch said in a report.

Mergers and acquisitions among European firms amount to 81.2 billion euros ($103 billion) so far this year, compared with 1.3 trillion euros at the market’s peak in 2007, Fitch said. Europe’s share of global M&A has fallen to 14 percent from an average 30 percent between 2005 and the third quarter of 2009, Bloomberg data show.

“Investors expect corporates to remain cautious on new investment, with 79 percent of survey respondents believing maintaining cash cushions is a significant or moderate priority for European firms,” Monica Insoll, managing director in Fitch’s credit market research group, said in the report.


If cash hoarding becomes a standard practice among companies (and individuals - look as the rising savings rate), then this is a sure sign of deflation.  When the velocity of money decreases, prices soon follow.