Archive for February, 2009

Have we hit bottom?

Posted on Thursday, 26 February 2009. Filed under: Mergers |

What’s happening in the M&A market? This is well covered elsewhere, and no one needs to be told that the volume of business is down from peaks. ‘Have we hit the bottom?’ is one question on everyone’s mind, and depending on who you talk to, the second question may be ‘How much longer until we hit the bottom?’

I think these are the wrong questions. There still – in historical terms – are lots of deals taking place. 2008 may have been a terrible year, but with $2.9 trillion of completed deals (yes, these still did complete, even if many shouldn’t have!), you would still have to reduce that already ‘low’ number by two-thirds to a level of $0.9 trillion to be at the peak we saw before the 1990’s. Many companies did deals in the 1980’s and many advisors made excellent money in that era as well. Perhaps we are just now back to levels more reasonable in that era.

The right question is: ‘What’s changed about the M&A market?’ There’s a lot of discussion about whether the world has truly changed or whether this downturn – extreme and painful as it is – is temporary. We really won’t know that answer for a number of years. Signals are mixed: you can point to some that say we’re heading for chaos in the streets and bare shelves in the supermarkets, yet others point in the direction of recovery by 2010, as evidenced by testimony earlier this week by the Federal Reserve Chairman.

Under either scenario, the need for companies to merge and acquire remains. Deal terms may be different than in the past. There will be many more ‘forced marriages’ such as the ones that the British government arranged last year. Sovereign wealth funds will continue to need to invest their petro-dollars and other currencies. The recession or depression will caused bankruptcies and insolvencies that will provide bargains to those still able to pay. Because of the depressed stock markets, volumes must be down (in purchase price terms) no matter what for a period, because prices are driven by the market valuations. But deals will still happen. They must and they will. There doesn’t need to be a trigger to the next M&A wave other than equity valuations. And for those, you can still ask the questions about whether we’ve already hit the bottom and if not, when will we…