For several years now we have seen a boom in the capitalization of tech companies. And in 2020-2021, the growth in the value of their shares is fueled by government plans to support the economy. As a result, new money comes to the stock market, which increases the capitalization of tech companies.
For example, 39.5% of merger and acqusition deals used stocks last year, compared to 27% in 2019. And there is no reason for this trend to stop in 2021.
The reason is that tech stocks are on the rise, so companies prefer to get big company stock rather than cash. Now the difference between stocks and earnings is one of the highest in history (after the dot-com bubble) and this fuels the use of stocks instead of cash in acquisitions.
Why tech companies are using stocks instead of cash for acquisitions?
Buyer companies prefer to use their stock instead of cash because it allows them to reduce their risk. They don’t just pay the fair price of the selling company, but make it participate in profits and losses.
As a result, this further boosts the share price of tech companies, which get to buy the companies they are interested in not for cash, but using their stock.
Given the ever-increasing stock buybacks, the big companies have enough shares and they can conduct mergers and acquisitions without issuing new shares (which would collapse their price).
And in the medium term, this could lead to a bubble even bigger than the dot-com bubble of the early 2000s.