‘Upside Risk’ in M&A

Posted on Monday, 8 March 2010. Filed under: Business History, Commentary, Mergers |

I saw a recent posting on the possibility of the stock markets having a ‘buyers’ panic’ as occurred in late summer 1982.  At that time, the market increased by 37% in less than two months, having started with an increase of almost 20% as institutional buyer kicked off the rally, which then had retail buyers coming in.  The posting on Seeking Alpha, entitled ‘Upside Risk Returns – Is Buyers’ Panic Next?‘, notes some interesting parallels with today’s markets, although the author is very clear to state that he doesn’t expect to see a similar market increase at this time.  But the possibility exists, and is worth noting.

I think there may be some parallels in the M&A market, although not necessarily with 1982 (which was not a particularly strong time for M&A … certainly in comparison with the developments and growth in the market that occurred later in the decade.  The issues to note are the pent-up demand for M&A deals from almost three years of slow activity.  Once the markets begin their upward path, will they break out rapidly?  Or, are the behavioural forces of inertia stronger (see my blog on ‘Mergers & Acquisitions and Behavioural Finance’).

In talking with people in the industry, they are quick to note that they have a large back-log of deals, the financing of M&A deals is now easier to obtain than any time in the past two and one-half years, there is a lot of financial sponsor (hedge fund, private equity fund, venture capital, etc) funding available and waiting to be invested and the M&A advisors at all points in the industry are hiring new employees (although these are often people who were made redundant two years ago when the M&A downturn was severe).  Thus, there could be a stampede to do deals if there’s a concensus that the markets will quickly increase and prices will be higher.  There may be a perception that there’s a very narrow window of opportunity.

More later…

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