M&A inflexion point: The turn to ‘up’ in activity
It’s dangerous calling a bottom to a market as you can be wrong and no one (and certainly not me) has a clear crystal ball, but doesn’t there certainly seem to be a marked turn in sentiment about the M&A market – and this is happening before everyone is ready to call the end to the recession or the stock market lows. Disturbingly, I still talk to a number of economists who say we’re in a ‘fool’s rally’ or on the uptick in the first part of a ‘W’ cycle where we might see further lows before the economy really gets a sustained recovery – the so-called ‘double dip’. Could the recent rise in M&A deals be the same?
Historically, the M&A markets have been driven largely by other factors, although still somewhat correlated to the overall economic cycle. (It is important to remember that correlation is not necessarily causation). Certainly there are parts of the M&A market that link closely to the economy: one of these is the market for depressed companies (even those who declared bankruptcy or had gone into insolvency), and the M&A Research Centre at Cass Business School released a study of that market in June which did — correctly — indicate that the level of such deals does increase after a downturn.
As noted in another write-up here (see: Has the M&A market returned? Green shoots turn into harvest time… ), the M&A market is showing strong signs of recovery, and not just in the aforementioned distressed deals. Companies are more willing now to dust off the plans for restructuring and acquisition, whether in the confectionary (Kraft / Cadbury, and possibly other bidders), entertainment (Disney / Marvel), social networking (MySpace to buy iLike for an undisclosed amount) or oil field services industries (where Baker Hughes’ $5.5bn takeover of BJ Services is the largest oil services industry deal in more than a decade), and not just the pharmaceutical deals of earlier this year when the recovery appeared to many to be a one-industry upturn!
Note that some of these deals were likely to have been long in the making, and some may even be deals that were planned back in 2007 but then postponed when the market collapsed. Kraft’s bid for Cadbury was most likely stimulated by Mars’ purchase of Wrigley in 2007 for $23 billion. Disney has long been adding to it list of characters, and Spiderman and the The Hulk have existing strong franchises. One can only imagine the new rides being planned now in Disneyland for Spiderman and the others. And the Baker Hughes deal has its roots in a long-term consolidation of the energy extraction industries.
Suddenly there’s an urgency in the board room and in the executive suite: will the general market recovery quickly raise the price of potential targets above the ‘bargain basement’ levels currently available? Especially if the specific target has been wounded by the recession, especially financially and cannot launch as powerful a defence to remain independent.
This broader base – and now somewhat sustained – recovery does, in this writer’s opinion, represent the inflexion point when the M&A market turns up. Do others see it the same?
Intelligent Mergers 
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