By Jeffrey Goldfarb
NEW YORK, Aug 28 (Reuters) - Deal-hungry companies are mixing it up a lot more this year -- using a combination of cash and stock to fund acquisitions twice as often as they did last year.
With more cash available because of low interest rates and stock prices timidly on the rise amid a market still considered volatile, companies have been hedging by using a combination instead of just cash or just shares alone.
"I can't recall the last deal we did that wasn't a cash/stock combination," said Brian Sterling, co-head of investment banking at Sandler O'Neill & Partners.
The volume of deals announced around the world has declined 15 percent from a year ago, according to research firm Dealogic, with cash-only deals down by about the same rate. Stock-only deals have plummeted 54 percent.
However, mergers using a mixture of the two have increased 92 percent from a year ago and account for about 20 percent of the $808 billion of global volume, nearly the same ratio as all-stock deals. Cash deals represent about 57 percent. At this time last year, hybrid deals accounted for just 9 percent of the volume.
"It's so different than the deals I was doing in 1999 and 2000 where everybody on both the target side and on the buyer side wanted all stock," said Keith Flaum, a partner who works primarily on technology deals in the mergers group at law firm Cooley Godward.
In the fourth quarter of 2000, all-stock deals accounted for 61 percent of the global volume across all sectors, cash deals 34 percent and hybrids 5 percent, according to Dealogic.
In addition to the volatile markets, merger professionals point to increased pressure from credit ratings agencies, a change in merger accounting rules and the dearth of private equity acquisitions, which typically boost the volume of all-cash deals, for the rise in mixed-currency deals.
Regulators recently eliminated the allowance of a technique known as "pooling of interests," by which two companies' balance sheets could be combined without having to account for goodwill and intangible assets.
Companies still like to use shares in deals to save on taxes, but by shifting to different accounting rules, bankers said there is no need to pay with as many shares as in the past.
"With pooling gone, you don't have that demand for issuing so much common stock, so people instead can look at what's the right mix of shares and debt to finance a deal, maintain the credit ratios that are wanted and be efficient from a return on capital standpoint," said Jim MacNaughton, a managing director at investment bank Rothschild.
On the other hand, too much cash, even at the attractive interest rates from the past year, often makes some percentage of shares a necessary component because of the risk of a credit downgrade.
"There's no doubt that for the major institutions that need steady access to capital markets, the rating agencies are being very tough on companies that are doing big deals and leveraging their balance sheets to do it, which translates into the need to issue common stock to protect credit ratings," MacNaughton said.
Sellers also have regained some bargaining power to influence the method of payment. For example, General Motors Corp. was able to insist on a healthy dose of cash when negotiating the $6.8 billion sale of its satellite TV business stake even though the buyer, News Corp Ltd. , would have preferred to use more shares, people close to the deal said.
Among other notable deals to use a mix of cash and stock this year are Zimmer Holdings Inc.'s $3.1 billion proposal to buy Swiss orthopedics company Centerpulse AG and Yahoo Inc.'s $1.6 billion deal to buy Overture Services Inc.
"Some leverage -- not a lot -- is returning to sellers," said Chris Varelas, Citigroup's global head of technology banking.
"When there was no leverage, deals were done in whatever currency the buyer wanted to use," he said. "But now that you're seeing some leverage return to sellers because of a bounce in valuations, and each side has a say, it usually serves both parties' interest to have a mix."
The flip side is that when using both stock and cash, it adds a layer of complexity to a deal, bankers said. Typically, a takeover target expects a higher premium when being bought with cash. When the stock component is added, the new financial wrinkles can snarl talks.
The uncertainty in the markets that continues to cloud valuations and strategic decision making for chief executives means that companies probably will continue to compromise by using a mix, however.
"Neither side wants all cash or all stock for consideration because of the volatility," Varelas said. "As a result, you reach this hybrid position."
(The Mergers column appears weekly. Comments or questions on this one can be e-mailed to jeffrey.goldfarb(at)reuters.com.)