Private equity is sitting on $400 billion in dry powder, or cash, while Fortune 1000 companies have more than $1.8 trillion of cash on hand, an increase of $271 billion over last year, according to Ernst & Young's Transaction Advisory Services.
As debt markets become more open, with banks willing to lend money for deals with higher leverage, private equity firms and corporations will begin to compete again on deals.
"Cash on balance sheets is at its highest level since 1951. At current rates, holding cash is very dilutive. If companies don't start using it, activists will say return it to shareholders. We have a lot of well capitalised companies. And financial sponsors are coming back meaningfully, as well," Parker said.
The percentage of deals using a mix of cash and stock more than tripled this year to 19 percent, while the percentage of pure cash and pure stock deals dropped, according to Thomson Reuters.
"We're seeing a marked shift toward mixed cash-and-stock and all-stock deals. It bridges the gap between sellers and buyers by allowing for upside participation from combination synergies and continued economic and market improvements," Parker said.
Hostile deals to increase
Extra cash on balance sheets, buoyed stock prices and rising corporate boardroom confidence points to an increase in hostile deal activity over the next year, bankers said. "In a corporate governance environment with fewer staggard boards and poison pills, hostile activity continues to be relatively robust. However, despite a number of high-profile bids, completion rates remain low," LeBrun said.
Kraft Foods Inc's $16 billion hostile offer for British confectioner Cadbury is typical of the move toward hostile deals, according to data from Thomson Reuters. Hostile bids represented only 0.9 percent of the M&A market this year, but that was still the highest rate of the past five years, the data showed.
"When you have a disconnect between market valuations and sellers' expectations, that tends to make buyers go hostile. It's exactly this kind of environment that is ripe for hostiles, though it's somewhat constrained by bank lending. With hostiles, there is no chance to do due diligence, and banks tend to be risk averse," Frumkin said.
"You need both CEO and board confidence to pursue M&A in general and hostiles in particular," Kaplan said. "You tend not to see a large number of hostiles. Typically, it's not what we advise companies to do -- only as a last resort."
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