At Venturi Wealth Management, we continually focus on the drivers of investment performance in the marketplace. Money allocated to stocks has been pursuing a shrinking universe of available opportunities, increasing some valuation metrics beyond historical standards.
Over the last 20 years, the number of U.S. publicly traded companies has declined approximately 50% to 3,700 companies.
Part of the reason for the number of companies compressing is the expansion of corporate merger and acquisition (M&A) activity.
Today, U.S. corporate cash reserves have reached approximately $2.2 trillion, and M&A focus is increasingly turning towards emerging technologies and disruptive business models. Leading technology companies, in particular, have continued to “roll up” the industry. A strategy employed by many technology companies is to attack the leader in a category by buying evolving companies to fill out product maps. From 2010 to 2016, the “Big 8” — Alphabet (Google), IBM, Facebook, Microsoft, Oracle, Cisco, Apple, and Amazon — completed approximately 480 acquisitions worth nearly $170 billion*.
When looking at the table below, one can see that the leading technology companies have used their cash to invest in companies that can help them retain some of their disruptive edge. Purchasing other companies can certainly cost more than gaining edge organically, but the desire for speed and scarcity value can outweigh the need to purchase technology at a better price.
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*Source : GSV Capital, A2Apple, June 11, 2017