Flush with cash, M&A market expected to heat up.

OODLES of cash and limited internal growth opportunities are expected to fuel a robust mergers and acquisitions market in 2005.

Businesses, which have squeezed the last ounce of productivity from their current operations, are expected to seek strategic acquisitions for further growth.

And venture and equity funds, many now reaching maturity, are frantically seeking investment opportunities for the cash they've been hoarding.

"There is $90 billion to $120 billion of committed capital sitting on the sidelines of venture capitalists and equity firms that needs to be deployed," said Doug Gonsalves, managing director of Burbank-based boutique investment banking firm The Spartan Group. "At some point these funds will either have to be deployed or they will have to give it back to investors, and it's one of the fundamentals of the investment community that you don't give it back."

For a number of sectors, the pickup has already begun. In the 12 months ended June, 2004, M&A activity in the mortgage and title sector increased 40 percent to 80 deals, compared with 57 deals for the comparable period a year ago, according to a recently released report by Sherman Oaks-based investment banking company Mosaic Capital LLC.

Several of those deals occurred locally, including LandAmerica's acquisition of Southland Title Corp. and the acquisition of WMC Finance Co. by a unit of General Electric Co.

Since then, some large acquisitions have taken place--witness the Kmart-Sears deal--but pundits figure we ain't seen nothing yet.

"There are conditions that are ripe for M&A activity," said Scott Anderson, senior economist at Wells Fargo & Co. "Companies have huge amounts of cash flows and there's not that many investment opportunities internally."

A survey conducted by Ernst & Young at the end of 2004 found that 96 percent of the participants expected to undertake a merger or acquisition in the next two years. Another 79 percent said they expected to form some sort of alliance and, on the other side of the equation, 63 percent said they expected to raise funds through the sale of subsidiaries.

For several years now, companies have been seeing strong earnings growth, and they've been stashing away the profits, unwilling to make financial commitments while the economic outlook was cloudy.

Many, including Van Nuys-based licensing company Cherokee Inc., began returning some of their cash to shareholders in the form of dividends, others increased dividend payments and still others invested in their own stock shares. But the nest eggs kept growing.

Last year, the S&P companies had a combined $600 billion in cash on hand--that's up from $260 billion five years ago.

Beginning in the third quarter of last year, profit growth cooled, and companies have begun to look elsewhere to boost their bottom lines.

"Not only do you have all this cash companies are sitting on, but they're looking at income statements and seeing a deceleration," said Anderson. "That provides incentives for companies to go out and think strategically."

As spending on technology remains slow, many expect that tech companies will seek growth through M&A deals.

But the deal making is expected to take place across many sectors.

"One great indicator of strategic buyer confidence is you're seeing more and more billion dollar deals getting done," said Gonsalves. "Those are the bet the farm deals, and that's a sign of confidence. But the other thing you're seeing is the strategic buyer is back in the market and they're doing add-ons, specific acquisitions to fill specific market needs and product needs. That's a great sign."

Strategic acquisitions offer companies under pressure to show continued profit improvement a quick fix with less risk than would be incurred trying to grow the business internally.

At the same time, venture capital and equity funds have been stockpiling money since the dotcom bust. Many played it close to the vest because of uncertainty in the stock market and a weak IPO market that limited the exit strategies for investors.

But the stock market has improved considerably, and along with it, the number of companies filing initial public offerings. The election is over, dispelling some of the uncertainty that had many sitting on the sidelines, and the price of oil is dropping again, at least for now.

All that is giving venture capitalists the green light to move forward again.

And equity investments offer pension funds and other institutional investors a better return than alternatives like the bond market.

Also noteworthy, the falling U.S. dollar is expected to lure foreign investors into the market, creating still more competition for acquisitions.

In fact, there is so much money available and so many motivated buyers, that prices for acquisitions could increase as a result.