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Stocks, not cash, fund takeovers

– Big deals are back. To fund them, buyers are using a little creative thinking and a lot of common stock to fuel the best quarter for global takeovers since 2007.

As they agreed to more than $900 billion of purchases in the second quarter, acquirers turned to their rising stock prices to finance the deals. For buyers with public listings, all-cash offers made up about one-third of the takeovers announced in the second-quarter, data compiled by Bloomberg show. A year earlier, all-cash bids accounted for two-thirds of deals, and in the five years through 2013 they averaged 50 percent, according to data compiled by Bloomberg.

In some cases, massive price tags meant buyers had to use shares: AT&T, which ended March with just $3.6 billion in cash and equivalents, is paying $48.5 billion for DirecTV with two thirds of that in its own stock – a move that will help protect its creditworthiness. In others, it is mandatory: Medtronic is acquiring Covidien for $42.9 billion in part to gain its Irish tax domicile. To comply with U.S. tax laws, that kind of deal – known as a tax inversion – requires the buyer to use its shares as part of the deal.

“By their very nature, truly transformational deals are likely to require a combination of cash and shares,” said Robert Rankin, co-head of corporate banking and securities at Deutsche Bank in London. “The equity rally over the last 12 months has helped facilitate large transactions.”

Drug companies, meanwhile, are using a third way to structure deals – swapping assets and forming joint-ventures as part of purchases.

The Standard & Poor’s 500 Index, which reached records in June, trades at 17.9 times reported profit, the highest multiple it’s fetched since 2010, according to data compiled by Bloomberg. The Stoxx Europe 600 Index reached a price-to-book value multiple of 1.9 times this month, its highest since 2008.

Broadly, global acquirers made $913 billion of purchases in the quarter, data compiled through June 27 show. That’s the busiest quarter since the third quarter of 2007, and nearly twice the average quarterly value of $555.6 billion in the prior five years.

European buyers have made the biggest shift away from cash, the data show, with all-cash purchases falling to just 28 percent of the $88 billion of takeovers announced by public companies during the quarter, compared with 68 percent from 2008 to 2013. Among U.S. buyers, all-cash purchases accounted for 31 percent of the $331 billion in deals announced, compared with 45 percent in the five years through 2013.

The largest purchase by a European acquirer in the quarter highlights just how desirable shares can be: Holcim Ltd.’s $40 billion merger with cement peer Lafarge SA was paid for entirely in stock. And General Electric Co. only secured its purchase of Alstom SA’s energy assets when it offered up its rail-signaling business, after rival joint bidders Siemens AG and Mitsubishi Corp. brought a complex package of assets sales and joint ventures to the table.

“The market is reacting well to many of these deals, so sellers are willing to take stock knowing that the market will likely reward the deal after,” said Steve Baronoff, chairman of global M&A for Bank of America Merrill Lynch.